Executive Briefings

Have Ghosts of E-fulfillment Nightmares Past Been Banished?

After the Christmas debacle of 1999, online retailers should have learned their lesson about the importance of fulfillment. But they can't do it alone. A new entity, called a third-party fulfillment provider, is here to help e-tailers deliver satisfaction to their customers and profits to the bottom line.

Online retailers have more than visions of sugarplums dancing in their heads as this Christmas season begins. With sales forecasts projecting a doubling of 1999 Christmas spending, online retailers have visions of big dollar signs appearing on their financial statements.

In fact, the leading analysts that follow online retailers, or e-tailers as they are called, are unanimous in their predictions for a huge holiday season. Boston-based Forrester Research predicts holiday spending will top $10bn, twice as much as last year's $5bn. Between Thanksgiving and New Year's, 16.6 million U.S. households, or 66 percent more than last year, will shop online, according to Forrester. San Francisco-based Jupiter Communications thinks that the value of online holiday shopping between November 1 and December 31 will reach $12bn. Stamford, Conn.-based GartnerGroup estimates that e-commerce sales will account for $10.7bn in the U.S. and Canada, and $19bn worldwide during the entire fourth quarter.

While these huge increases in sales may seem like a welcome holiday present, many e-tailers had better check to see if the box is ticking. Online Christmas shoppers have made it clear that they expect much better service, order fulfillment and delivery than they received last year. The Federal Trade Commission, which levied record fines to many e-tailers for their Christmas failures, has said it will not look kindly on those who repeat the fulfillment problems of 1999.

This holiday season will be a make-or-break year for e-tailers. Large toy companies, such as eToys and ToysRus.com , have spent heavily on new warehouses and fulfillment systems to meet exploding demand, but what about the hundreds of smaller players that don't have the resources to build fulfillment infrastructure?

A growing number of e-tailers are turning to outsourcing their fulfillment operations to a new entity called a third-party fulfillment provider, or 3PF.

"E-commerce participants will increasingly turn to third-parties to help them navigate the evolving logistics landscape," says Tim Quillen, an analyst with the Little Rock, Ark.-based investment firm of Stephens Inc. "The 3PFs are far more sophisticated in terms of people, processes and technology. They allow e-tailers to focus on establishing an online presence in a dynamic atmosphere."

The 3PF trend, however, is just beginning, and many e-tailers have not recognized the need for this expertise. They will over the coming weeks.

"It takes millions of dollars and probably about 18 months to fully implement a top-quality fulfillment system," says Dina Marie Schon, executive vice president of global sales for FULLeCOM, a 3PF provider in Ontario, Calif. "Even if they started in January last year, e-tailers cannot be ready. Realistically, few have done much of anything because they don't have the money. The smart ones have outsourced the fulfillment."

Schon says this gift-buying season will be nearly as difficult for many e-tailers as last year when the dissatisfaction rate among online customers reached 45 percent.

"This year it might be only 35 percent," says Schon, "but not enough improvement has been made by the industry to make a significant difference."

Despite claims to the contrary, she doubts that most e-tailers have solved their fulfillment problems and worries that false promises are likely to backfire.

"The worst thing you can do is to create a false sense of security," says Schon. "When a customer is disappointed, everybody loses. The consumer does not receive the product for Christmas. The merchant's order is probably cancelled, so his margins are destroyed. Even worse, the merchant also loses that customer forever."

Perhaps the main reason that Schon sees for continuing problems among e-tailers is that merchants do not realize what they need to do to turn the situation around.

"Few e-tailers realize that the problem is not just fulfillment," says Schon. "The worst fulfillment operation on its worst day will have about 15 percent order errors, so the dissatisfaction rate of 45 percent is caused by other factors as well."

Schon says that customer satisfaction for business-to-consumer (B2C) e-tailing starts at the moment the buyer clicks for payment. For most of its 600 merchant customers, FULLeCOM captures credit information on its system, where it can instantly connect to credit card company systems. Within three to five seconds of entering the credit card information, FULLeCOM issues an authorization or a declination, along with a reason.

"Between 35 to 42 percent of credit cards are declined during the Christmas season, usually for insufficient credit," says Schon. "If there is a problem, it is vital to end the process here, but 80 percent of e-tailers don't check credit cards until long after the sale."

Most fulfillment systems automatically issue a confirmation, according to Schon. If the credit is declined, the merchant has to notify the customer of the problem days later - after the customer assumes the order has been shipped.

"The customer will blame the e-tailer for confirming the order, even if their own credit is the root cause," says Schon. "To avoid this type of customer dissatisfaction, credit has to be checked in real time while the consumer is online."

After the credit is checked, FULLeCOM verifies that the item is in stock and available. A screen tells the customer the order is confirmed, and it gives a receipt number and an order tracking number. An e-mail with the same information also is sent to the consumer. The merchant receives a similar message via e-mail, EDI or whatever format is requested.

Ten seconds after an order is placed and confirmed, the order is in the warehouse. It is immediately picked. The manifest is printed, inventory is lowered and the reorder point is updated

"We are 100 percent in stock for every item we handle," says Schon. "We get 100 percent of the order out the door the same day."

Reordering is a key issue because of the damage that out-of-stock situation can cause, says Schon. It often takes nine weeks to receive restocking from offshore suppliers, so safety stock is an important matter.

"We keep 15 weeks in safety stock, because lead times are notoriously unreliable," says Schon.

When this reorder point is reached, the merchant is notified with an online message or e-mail, as well as a phone and fax message.

FULLeCOM is about to introduce automated replenishment for its merchant customers. According to Schon, the technology is in place.

"It is now a matter of getting the customer comfortable with the idea of our handling their purchasing," says Schon. "Much of the merchandise is ordered through third-parties, usually overseas. Merchants have to be shown that we can handle this process for them better and faster than they can. It's an education issue."

By internet standards, FULLeCOM is a veteran 3PF with two full Christmas seasons behind it. Last year it moved more than 600,000 items during the four-week Christmas season. They expect to quadruple that number this year.

Getting Smart: From Outsourced to In-house

SmarterKids.com outsourced fulfillment its first two years of operation with few problems, but in early 2000 it decided the time had come to take more control. The seller of children's' educational toys and products decided to build its own distribution center in Mansfield, Mass., and to manage it in-house, with the help of the WarehousePro system from Logility, based in Atlanta.

SmarterKids previously had an arrangement with J.L. Hammond, a leading marketer of educational products, to source, store and ship its inventory. But both Hammond and SmarterKids were growing rapidly. "Our company's needs were affecting Hammond's ability to handle its own business," says Mark DeChambeau, vice president of operations for SmarterKids.com. In addition, he says, "We did not have real-time visibility to orders and inventory, which created the potential for out-of-stock and customer service issues, as well as decreased our ability to manage our investment in inventory."

To make the transformation in time for the 2000 holiday season, SmarterKids.com had to move fast. It employed Tompkins Associates of Raleigh, N.C., to design the 140,000-square-foot DC and to consult on technology and implementation.

"The DC is totally an e-commerce design," says DeChambeau. "What we do is fill consumer orders so it has a lot of flow racks to facilitate 'each' picking." One of the challenges of e-tail fulfillment is the speed with which the storefront changes, he says. "You can set up for A, B and C movers but two weeks later that might completely change. A movers become C movers and B movers become A movers, so you might have an item in put-away that should be on flow racks."

To meet this challenge the SmarterKids warehouse was designed to support more than half of its stocked items in high-volume flow racks. "The whole idea was to give merchandising the most flexibility possible while allowing us to pick the orders within our time constraints," says DeChambeau. At SmarterKids.com, most orders ship within 24 hours of receipt.

The warehouse management system from Logility is a key element in meeting this inventory-turn goal and was crucial to getting the DC up and running in a three-month timeframe. The software was installed and tested while the DC was still under construction. "It has been a pretty smooth transition," says DeChambeau. "It typically takes a year and a half to set up a distribution center. We were able to condense that into a very short period."

WarehousePro, he says, "brings organization and structure to the warehouse. Basically, it allows us to pick orders faster with fewer employees. That's the competitive advantage we were looking for."

Order fulfillment information is downloaded from the web site to WarehousePro every hour. An order planner organizes these into work units of nine orders each, nine being the number of totes that fit on a picker's cart. WarehousePro optimizes the pick and transmits the picking tasks to a warehouse employee wearing a wrist-mounted radio-frequency scanner. The scanner displays the pick list on a small screen in a way that moves the picker through the warehouse in the most efficient manner. Orders usually are picked within two minutes, a rate of about 20 seconds per item. "We can turn about 1,400 orders in eight hours with 8 people picking and four people packing," says DeChambeau. That would have required about 50 people under its previous arrangement with Hammond, "which did not have a sophisticated system at all."

Accuracy also is improved. Pickers scan each item as it is picked and complete orders go through a quality check before moving on to packing and shipping.

"The whole warehouse is tremendously efficient," says DeChambeau. "and I have all the information I need to monitor operations. I can go to my computer and find out how many orders have shipped today, what the work flow has been, and how many units of work were completed by each picker, which helps track productivity." Before, monitoring took place after the fact and was dependent on phone, fax and Excel spreadsheets.

"I think the most positive aspects of the whole system are the overall productivity gains and cost savings," DeChambeau says. "There's nothing better than driving down your overhead."


FULLeCOM started in 1996 doing fulfillment for various direct marketers, including television infomercial retailers, such as Body by Jake. E-tail fulfillment is rapidly becoming its primary focus. FULLeCOM recently moved into a new state-of-the-art e-fulfillment warehouse in Ontario, Calif., just five miles from major hubs for both FedEx and UPS. The 250,000-square-foot facility is just as close to the Ports of Long Beach and Los Angeles where much of the merchandise arrives from Asia.

FULLeCOM provides full order tracking, including direct data feeds from UPS and FedEx. The customer will access information through the merchant's site, but it is actually on the FULLeCOM system.

Many customers still want to track over the phone, which they can do through call centers operated by FULLeCOM.

Merchants can do more than just outsource the order-filling operations to FULLeCOM, which as an application service provider (ASP), offers a full array of online support services. Merchants can access all fulfillment activity in real time through what FULLeCOM calls its virtual terminal. Just using a browser, merchants can monitor orders, SKU levels and transaction activity. They can download reports on cost-per-order, transaction volume, revenue and payments information, and virtually anything they could do with an in-house enterprise system.

Until this year, FULLeCOM used systems developed in-house. Because of greatly increased volumes, FULLeCOM is now using new, web-centric e-fulfillment and customer relationship management (e-CRM) software from Industri-Matematik International, based in East Orange, N.J. The web-centric software will allow FULLeCOM to integrate its customer care services, fulfillment operations and ASP offerings in one complete solution.

"We considered a number of e-commerce vendors but only Industri-Matematik offered integrated web customer service and fulfillment software designed for dotcom environments," says John Gioeli, executive vice president and chief logistics officer at FULLeCOM. "Our company is expanding quickly. We foresee outgrowing the fulfillment and customer service systems we put in place just 18 months ago. The e-fulfillment/e-CRM solution can be implemented rapidly and it's the only solution with the proven functionality and scalability to support our current peak order volumes and future high growth."

Outsourcing to a 3PF like FULLeCOM can provide many types of savings, according to Schon. Just by checking the credit information, Schon says, a 3PF can save the merchant about 40 percent.

"All of the bad-credit problems just go away," she says.

Merchant customers that use FULLeCOM's complete end-to-end solution, Schon says, usually can cut the cost per order in half.

"Using our service, the full fulfillment cost is about 15 percent of the selling price," says Schon. "Customers that handle it themselves usually pay about 30 percent. By piecing together a best-of-breed approach, the cost is usually 22 percent."

The non-financial benefits of outsourcing are just as important to the e-tailer, according to Schon.

"There is total accountability with one source of information that is complete and real time," she says. "There are no gaps in the information and no miscommunication between all the parties in order cycle from credit to delivery."

The systems gap
Henry Bruce, vice president of marketing for fulfillment software vendor, Optum of White Plains, N.Y., agrees that this Christmas season will bring major problems for most e-tailers, and perhaps with 3PFs.

"The problems may not be as shocking as last year's, but most fulfillment operators have not made the changes that are needed in terms of systems and technology," he says.

According to Bruce, most e-tailers and 3PFs have failed to recognize the much higher service requirements of online B2C fulfillment operations, which include three elements:

• Piece-picking material handling orientation that allows high-volume, scalable operations for a vast number of SKUs

• Internet-enabled systems that provide the content and information that all parties - including the consumer, the merchant and the 3PF - need to see in real time

• Front-end to back-end integration of systems, so the order can be confirmed while the consumer is still online.

The largest single failure of most fulfillment systems is lack of an available-to-promise capability.

"The consumer needs to see the specific item he wants in terms of size, color and features, and then he must be able to make sure it is in stock," says Bruce.

He says there also must be a delivery option page that allows the consumer to see the costs and transit time for all carriers. Only after the consumer has a firm order confirmation, a definite delivery time and a total landed cost should the order be locked in. Few e-tailer sites offer this capability.

Most e-tailers and 3PFs use batch information today, according to Bruce. He says that this arrangement only works adequately when immediate confirmations are not needed and when three- or four-day delivery is acceptable.

"These batch fees are a real problem for high-service B2C e-tailing sites where expectations are high," says Bruce. "Consumers are paying very high prices for assured confirmation and immediate delivery. They don't want to hear hours after they placed an order that the item is out of stock."

Optum's web-enabled fulfillment software, such as TradeStream, provides all of these capabilities, Bruce says. He points to iFulfillment, a Chicago-based 3PF, as an example of how a start-up company is in a good position to leap-frog competition because it can start from scratch with the latest material-handling systems and fulfillment software.

iFulfillment runs its 350,000-square-foot fulfillment center in Bolingbrook, Ill., with a highly customized version of Optum's fulfillment applications. It will face its first full Christmas season this year with Nordstrom.com as its first major customer. It is now handling Nordstom.com's shoes, but soon expects to handle all the e-tailer's hard lines.

According to Jeff Woods, iFulfillment's vice president of strategy, the entire business was a ground-up e-commerce-engineering project.

"There are no legacy systems," says Woods. "All systems are web-based, so iFulfillment and its merchant customers have online inventory visibility and reporting tools. Even the optimization modules are web-based," says Woods, who adds that merchants can re-order their own product through iFulfillment.

The Optum system provides merchants with a built-in inventory and purchasing management system that shows them what is in stock and what needs to be ordered. Merchants can cut a purchase order from the iFulfillment site.

"These operational efficiencies provide our merchant customers with fulfillment cost savings of 30 to 50 percent," says Woods.

For the B2C consumer, the real-time capability allows them to get online order confirmations and shipping selections.

"The buyer knows the final complete costs at the time of check out," says Woods. He adds that iFulfillment takes online status information from express carriers and creates an online order-tracking screen, which is displayed on the merchant's site.

The greatest consumer benefit of the iFulfillment system is its speed and accuracy. According to Woods, his company can pick and pack a pair of shoes in 10 minutes from the time the order reaches the fulfillment center floor.

He says, "There is one hour from the consumer's click to the moment the order is out the door." Woods claims there has been accuracy in order picking since the operation started earlier this year.

Enter the 3PLs
Outsourcing fulfillment in the business-to-business (B2B) world is a well-established practice. Third-party logistics companies (3PLs) and public warehouses have become a standard element in many companies' logistics networks. It is logical that they would want to be a player in the burgeoning B2C e-tailing market.

Jacksonville, Fla.-based GATX Logistics, one of the largest 3PLs in the U.S., decided in 1999 to get into the fulfillment business. However, the 3PL also realized that this consumer-based business was very different from its normal pallet-in/pallet-out operations for B2B customers.

"We decided we had to start from scratch, so we created a new company," says Tom Scanlin, vice president of market development for GATX eLogistics, which runs its fulfillment operations from a new, dedicated B2C facility in Hebron, Ky. "It is separate from the parent in nearly every way."

"We use the logistics systems and freight management services of GATX Logistics, but everything else about GATX eLogistics is separate," says Scanlin.

The Hebron facility is designed from the ground up to handle high-volume consumer orders that are shipped out as single parcels.

According to Scanlin, GATX entered the B2C fulfillment business because of the opportunity for rapid and profitable growth that this marketplace represents. Total retail sales in the U.S. are around $3tr, according to Scanlin, but e-tailers have only one half of one percent of this volume, or about $15bn. He expects this share of market to grow to about five percent within five to 10 years, which in today's dollars would amount to $150bn.

Of the current $15bn in online B2C sales, Scanlin says only about 10 percent of the fulfillment business is outsourced. He expects this to grow to 50 percent in a few years.

"The operational efficiencies and economics of outsourcing fulfillment are very compelling," says Scanlin, "but only very good operators are going to be able to capture significant portions of this new business."

Scanlin sees at least four reasons why more and more e-tailers will outsource their fulfillment to 3PFs:

1. The complexity of e-tailing fulfillment requires high investment in systems, material handling resources and expertise. Start-up e-tailers have neither the time nor resources. Venture capitalists are impatient for results, he says. The investors have concluded that their money should be directed to making the business grow, while fulfillment is better turned over to specialists.

2. E-tailing is a virtual world. Every e-tailing site requires multiple alliances for handling credit, payment, content, live chat, call centers, shipping, and all of the other functions that consumers have come to expect. It is difficult and expensive for most e-tailers to provide the best services, but customers demand them. GATX eLogistics provides these services through a partnership with e-commerce software vendor Interworld, whose Commerce Exchange software allows merchant customers to greatly enhance their e-commerce capabilities with buyer databases, special files for VIP buyers, credit card handling and merchandizing features. Merchant customers pay only about half of the normal licensing fee for this software because they are piggybacking on the GATX eLogistics license.

3. Delivery costs are a key component to profitability. The e-tailers model substitutes high quality parcel transportation for investment in retail outlets, so every penny that can be taken off that cost is profit to the e-tailer. eFulfillment operators that can establish lower rates and better service agreements with major parcel carriers can significantly lower the delivery costs.

4. Inbound transportation costs are overlooked but significant. Only large fulfillment operators will have the volume and expertise to set favorable contracts with many trucking companies.

There is plenty of competition for the outsourced fulfillment business. Scanlin estimates that there are between 50 and 100 e-fulfillment companies today, including 3PLs that have entered the B2C market, start-up 3PFs and established retailers like J.C. Penney and Fingerhut that take on outside e-tailer clients.

Scanlin believes there are several key performance questions that e-tailers should focus on when making their outsourcing decision.

First, is the facility designed and engineered specifically to handle high volume B2C fulfillment? "Operations that are primarily manual are going to break down." Second, does the facility have state-of-the-art WMS and fulfillment systems that can handle real time picking? Third, is the facility near enough to major parcel carrier hubs to allow late cut-offs for same-day order shipment?

"We have most competitors beat on all of these points," says Scanlin, who adds that his company can save most merchants five dollars on every order because of operating efficiencies and transportation expertise.

"There is no slack in B2C fulfillment," says Scanlin. "Either you get it 100 percent correct, or you have a dissatisfied customer that is likely to be lost forever. You better get it right."

According to Scanlin, consumer orders are picked and shipped within 24 hours, and usually much less. Orders are received through the customer's order processing system, and every five minutes, are queued up and sent to the warehouse. The cube and weight of each item on the pick list is known because they are physically weighed and measured when received. Based on these specifications, the correct box is automatically selected, tagged with an internal routing card and put on the automated conveyer system. The routing card tells the system where to send the box on the picking lines. At each picking station, the routing card is scanned to verify the exact item to be picked. The item is picked and scanned again as it is put in the box, which lets the system know to move the box to the next picking station. The process is repeated until the order is filled. It returns to the shipping station where a shipping label is attached and the order is loaded onto a truck.

One of GATX eLogistics customers is LuxLook.com, a high-end e-tailer of designed accessories, many costing hundreds or thousand of dollars. These high-value items are stored and picked in a high-security area of the warehouse. The items and all related material inserts are placed into the box and sealed in the high-security area before it moves to the shipping area.

The merchant captures order information on his or her web site and messages it to GATX eLogistics every 15 minutes. An order confirmation is sent back to the merchant's enterprise resource planning (ERP) system. When the item is shipped, another confirmation is sent out along with tracking number to both the merchant and to the consumer. Because of the high volumes, data transfers are through a T1 line that is always on. Data is transferred in EDI, flat files, or as XML event-driven messages.

The merchant determines how the consumer can track an order. Some just provide a tracking number and link to the parcel carrier. For others, such as LuxLook, GATX creates a tracking function directly on the merchant's site. Consumers get tracking information automatically just by logging on the site.

Customer ERP systems match the order availability in the GATX WMS system so they are in sync.

Returns are a tiny percent of the orders that GATX eLogistics handles, but there are standard operating procedures for handling the process. Every outgoing order includes a return shipping label and instructions. A customer that wants to return an item for any reason has to call the e-tailer to receive a customer return number, which the customer writes on the box. The e-tailer transmits that number to GATX eLogistics, along with the original order number and the reason for the return. When the returned order is received by GATX, the number is entered into the systems. GATX knows what to expect and what condition it should be in. The product is disposed of or returned to stock according to rules the merchant has established.

One of GATX eLogistics's newest seasonal customers is Seattle-based Gear.com, which is an e-tailer of closeout sports equipment and clothing for outdoor enthusiasts. For Gear, inbound transportation is a major issue. It buys closeout lots from manufacturers and other retailers all over the country. The challenge is to bring the inventory into the Hebron warehouse as quickly as possible and at a low transportation cost. "Inbound transportation comes right out of the margin," says Gear.com's director of systems operations, Chris Woods.

Using the freight management services of GATX Freight Systems and the contracts that it has with hundreds of carriers, GATX eLogistics routes the inbound shipments to Hebron. GATX's inbound transportation capabilities help to find the fastest, lowest cost route.

Receiving accuracy is a key performance indicator for all of its customers, but especially with an operation like Gear that deals in closeouts.

"You cannot go by what the manifest says because they are rarely correct," says GATX's Scanlin. "We open every box we receive, weigh each item and scan it into the WMS system so our data is correct from the start.

"Any mistake at receiving will eventually show up as an order error, so we want to avoid this at the first opportunity," says Scanlin, who adds that meticulousness in receiving is a critical operation that few fulfillment operators pay enough attention to.

Gear.com switched to GATX eLogistics earlier this year from a local fulfillment operator in the Seattle area "Gear.com was losing money on 70 percent of its orders," says Scanlin. "Now they are making money on 90 percent of them."

The major problem was that each order was taking two to three days to fill. The only way to meet customer service commitments was to ship via second-day air. That added cost ate up all the profit. Now orders are turning around in one day or less and can be shipped via ground. The transportation costs are cut in half, and service is at least as good.

Order confirmation is another key factor for Gear.com. It carries about 15 thousand SKUs in stock at any one time, but as a closeout operator, the item selection is constantly changing.

"Usually, once an item is out of stock, it's not going to be available again," says Woods, who adds that this small ordering window makes it vital that customer orders are confirmed. "There is no opportunity to back-order."

GATX eLogistics integrated with Gear's SAP ERP system, which allows it to verify that orders can be filled. This is handled in near real time with frequent data transfer between the ERP system and the GATX eLogistics WMS system

Scanlin says he sees this Christmas as a breakthrough opportunity for all 3PFs, and for GATX eLogistics in particular.

"Every e-tailer knows what will happen if they repeat last year's debacle," says Scanlin. "We have sold our customers on the basis that we are going to help them meet customer expectations, regardless of volume and demand. We know if we perform as flawlessly as we believe we will, GATX eLogistics will have a major marketing advantage over competitors for future fulfillment business."

The 800-pound Gorilla of Online Toy Sales

With 1999 Christmas sales revenue of $152m, eToys is the uncontested leader in the online toy sales market.

In fact, it takes the next three competitors' sales combined to equal the Christmas revenue figure for the Santa Monica, Calif.-based e-tailer. But 2000 must be an even better year for eToys. Like most dotcoms, eToys is under tremendous pressure from investors to improve revenue and margins and to prove its long-term viability with high levels of service. Prospects look better for eToys than for many of the other online toy e-tailers, most of which had a disastrous Christmas season last year. According to industry analysts, sales revenue in the fourth quarter Christmas season for eToys should increase by nearly 70 percent over last year and reach at least $240m. Just as important, eToys seems to have solved the customer service problem that plagued most of the toy e-tailers last year. Unlike most of the nine major online toy e-tailers in business last Christmas, eToys claims to have provided a high level of customer service. According to an eToys spokesman, the company delivered 99 percent of all orders in time for the holidays. Other figures provided by industry analysts peg the service level at about 96 percent, but in any case, it greatly exceeded the figures for other toy e-tailing competitors. Not surprisingly, at least four of them have closed their doors since last Christmas.

One reason for eToys' expected higher service levels this year is a new state-of-the-art, two-million-square-foot distribution center (DC) in Blairs, Va. With this new DC on the East Coast and its existing one on the West Coast, eToys will be able to provide faster delivery to customers. It should also be able to lower shipping costs since UPS, FedEx and other parcel carriers price their services according to zones.

Last year, eToys used a substantial amount of third-party fulfillment, but a company spokesman says that outsourcing was always a bridging strategy.

"Our distribution and fulfillment is 100 percent in-house now, which gives us the control we need," says the spokesman.

According to Toby Lenk, eToys president and chief executive officer, having two state-of-the art DCs provides the infrastructure needed to meet the high service expectations of online Christmas shoppers. He says that the company has been poised for a very large holiday season and has been rehearsing for peak volumes since early summer.

``Over the last year, the entire organization has been intently focused on putting in place the capabilities that will allow us to aggressively pursue a successful holiday season, to solidify our market leadership and to meaningfully advance our march to profitability,'' said Lenk. ``Bottom line: We are well positioned and highly prepared to continue to deliver the best customer experience in online children's retailing.''

The new East Coast DC is driven by a warehouse management system provided by eSYNC International of Toledo, Ohio, called eWMS. It is a highly automated distribution solution consisting of a radio frequency-based WMS, integrated with slat shoe and multiple tilt-tray sortation systems. The facilities distribute thousands of items to eToys' customers across the country. eSYNC was responsible for both information systems and operational project management as well as overall systems development and deployment.

Both facilities are ready to deliver the goods for the holiday shopping season. The order and fulfillment process is similar at the two DCs.

Once the order is taken and cleared by the web site, the eToys enterprise system makes a decision from which DC in the network to ship the order. The default setting is to ship from a DC closest to the destination in order to keep shipping charges low and to speed delivery to the customers. Once the DC is chosen, the order is sent to the local warehouse management system at the DC. Orders are printed and picked regularly throughout the day. As the order is picked and packed it is checked multiple times for accuracy. The system compares each product placed into the order with a digital computer image on the packing monitor. It also uses barcode technology to scan the unique UPC code on each product to insure the right item was packed. Additionally, when all items are packed into the box the conveyance system weighs the package and compares it to the expected combined weight for the items in the package. If it doesn't match, the package is checked again. Finally, the eToys customer service group randomly samples outbound packages for accuracy and presentation. All of these checks and processes help achieve some of the highest order accuracy rates in the business.

A customer can be assured that the product is in stock before an order is placed. The system allows the customer to look at virtually real-time inventory available in each DC. The e-tailer has one of the lowest returns rates in the e-commerce business and is in the low single digits in terms of percentage of sales. According to an eToys spokesman, the low returns rate is attributable to very few shipping errors and complete product and shopping information when the customer is making a selection.

In the event a customer wants to return an item, every order is shipped with a pre-paid merchandise return label. The customer completes a return form on the back of their invoice and applies the return label to the box. When the box arrives at the eToys DC, the returns department processors takes the action requested by the customer. eToys will either credit the customer's account, reship the same item or a different one, or cancel the order. There is no restriction on when an item can be returned.

Online retailers have more than visions of sugarplums dancing in their heads as this Christmas season begins. With sales forecasts projecting a doubling of 1999 Christmas spending, online retailers have visions of big dollar signs appearing on their financial statements.

In fact, the leading analysts that follow online retailers, or e-tailers as they are called, are unanimous in their predictions for a huge holiday season. Boston-based Forrester Research predicts holiday spending will top $10bn, twice as much as last year's $5bn. Between Thanksgiving and New Year's, 16.6 million U.S. households, or 66 percent more than last year, will shop online, according to Forrester. San Francisco-based Jupiter Communications thinks that the value of online holiday shopping between November 1 and December 31 will reach $12bn. Stamford, Conn.-based GartnerGroup estimates that e-commerce sales will account for $10.7bn in the U.S. and Canada, and $19bn worldwide during the entire fourth quarter.

While these huge increases in sales may seem like a welcome holiday present, many e-tailers had better check to see if the box is ticking. Online Christmas shoppers have made it clear that they expect much better service, order fulfillment and delivery than they received last year. The Federal Trade Commission, which levied record fines to many e-tailers for their Christmas failures, has said it will not look kindly on those who repeat the fulfillment problems of 1999.

This holiday season will be a make-or-break year for e-tailers. Large toy companies, such as eToys and ToysRus.com , have spent heavily on new warehouses and fulfillment systems to meet exploding demand, but what about the hundreds of smaller players that don't have the resources to build fulfillment infrastructure?

A growing number of e-tailers are turning to outsourcing their fulfillment operations to a new entity called a third-party fulfillment provider, or 3PF.

"E-commerce participants will increasingly turn to third-parties to help them navigate the evolving logistics landscape," says Tim Quillen, an analyst with the Little Rock, Ark.-based investment firm of Stephens Inc. "The 3PFs are far more sophisticated in terms of people, processes and technology. They allow e-tailers to focus on establishing an online presence in a dynamic atmosphere."

The 3PF trend, however, is just beginning, and many e-tailers have not recognized the need for this expertise. They will over the coming weeks.

"It takes millions of dollars and probably about 18 months to fully implement a top-quality fulfillment system," says Dina Marie Schon, executive vice president of global sales for FULLeCOM, a 3PF provider in Ontario, Calif. "Even if they started in January last year, e-tailers cannot be ready. Realistically, few have done much of anything because they don't have the money. The smart ones have outsourced the fulfillment."

Schon says this gift-buying season will be nearly as difficult for many e-tailers as last year when the dissatisfaction rate among online customers reached 45 percent.

"This year it might be only 35 percent," says Schon, "but not enough improvement has been made by the industry to make a significant difference."

Despite claims to the contrary, she doubts that most e-tailers have solved their fulfillment problems and worries that false promises are likely to backfire.

"The worst thing you can do is to create a false sense of security," says Schon. "When a customer is disappointed, everybody loses. The consumer does not receive the product for Christmas. The merchant's order is probably cancelled, so his margins are destroyed. Even worse, the merchant also loses that customer forever."

Perhaps the main reason that Schon sees for continuing problems among e-tailers is that merchants do not realize what they need to do to turn the situation around.

"Few e-tailers realize that the problem is not just fulfillment," says Schon. "The worst fulfillment operation on its worst day will have about 15 percent order errors, so the dissatisfaction rate of 45 percent is caused by other factors as well."

Schon says that customer satisfaction for business-to-consumer (B2C) e-tailing starts at the moment the buyer clicks for payment. For most of its 600 merchant customers, FULLeCOM captures credit information on its system, where it can instantly connect to credit card company systems. Within three to five seconds of entering the credit card information, FULLeCOM issues an authorization or a declination, along with a reason.

"Between 35 to 42 percent of credit cards are declined during the Christmas season, usually for insufficient credit," says Schon. "If there is a problem, it is vital to end the process here, but 80 percent of e-tailers don't check credit cards until long after the sale."

Most fulfillment systems automatically issue a confirmation, according to Schon. If the credit is declined, the merchant has to notify the customer of the problem days later - after the customer assumes the order has been shipped.

"The customer will blame the e-tailer for confirming the order, even if their own credit is the root cause," says Schon. "To avoid this type of customer dissatisfaction, credit has to be checked in real time while the consumer is online."

After the credit is checked, FULLeCOM verifies that the item is in stock and available. A screen tells the customer the order is confirmed, and it gives a receipt number and an order tracking number. An e-mail with the same information also is sent to the consumer. The merchant receives a similar message via e-mail, EDI or whatever format is requested.

Ten seconds after an order is placed and confirmed, the order is in the warehouse. It is immediately picked. The manifest is printed, inventory is lowered and the reorder point is updated

"We are 100 percent in stock for every item we handle," says Schon. "We get 100 percent of the order out the door the same day."

Reordering is a key issue because of the damage that out-of-stock situation can cause, says Schon. It often takes nine weeks to receive restocking from offshore suppliers, so safety stock is an important matter.

"We keep 15 weeks in safety stock, because lead times are notoriously unreliable," says Schon.

When this reorder point is reached, the merchant is notified with an online message or e-mail, as well as a phone and fax message.

FULLeCOM is about to introduce automated replenishment for its merchant customers. According to Schon, the technology is in place.

"It is now a matter of getting the customer comfortable with the idea of our handling their purchasing," says Schon. "Much of the merchandise is ordered through third-parties, usually overseas. Merchants have to be shown that we can handle this process for them better and faster than they can. It's an education issue."

By internet standards, FULLeCOM is a veteran 3PF with two full Christmas seasons behind it. Last year it moved more than 600,000 items during the four-week Christmas season. They expect to quadruple that number this year.

Getting Smart: From Outsourced to In-house

SmarterKids.com outsourced fulfillment its first two years of operation with few problems, but in early 2000 it decided the time had come to take more control. The seller of children's' educational toys and products decided to build its own distribution center in Mansfield, Mass., and to manage it in-house, with the help of the WarehousePro system from Logility, based in Atlanta.

SmarterKids previously had an arrangement with J.L. Hammond, a leading marketer of educational products, to source, store and ship its inventory. But both Hammond and SmarterKids were growing rapidly. "Our company's needs were affecting Hammond's ability to handle its own business," says Mark DeChambeau, vice president of operations for SmarterKids.com. In addition, he says, "We did not have real-time visibility to orders and inventory, which created the potential for out-of-stock and customer service issues, as well as decreased our ability to manage our investment in inventory."

To make the transformation in time for the 2000 holiday season, SmarterKids.com had to move fast. It employed Tompkins Associates of Raleigh, N.C., to design the 140,000-square-foot DC and to consult on technology and implementation.

"The DC is totally an e-commerce design," says DeChambeau. "What we do is fill consumer orders so it has a lot of flow racks to facilitate 'each' picking." One of the challenges of e-tail fulfillment is the speed with which the storefront changes, he says. "You can set up for A, B and C movers but two weeks later that might completely change. A movers become C movers and B movers become A movers, so you might have an item in put-away that should be on flow racks."

To meet this challenge the SmarterKids warehouse was designed to support more than half of its stocked items in high-volume flow racks. "The whole idea was to give merchandising the most flexibility possible while allowing us to pick the orders within our time constraints," says DeChambeau. At SmarterKids.com, most orders ship within 24 hours of receipt.

The warehouse management system from Logility is a key element in meeting this inventory-turn goal and was crucial to getting the DC up and running in a three-month timeframe. The software was installed and tested while the DC was still under construction. "It has been a pretty smooth transition," says DeChambeau. "It typically takes a year and a half to set up a distribution center. We were able to condense that into a very short period."

WarehousePro, he says, "brings organization and structure to the warehouse. Basically, it allows us to pick orders faster with fewer employees. That's the competitive advantage we were looking for."

Order fulfillment information is downloaded from the web site to WarehousePro every hour. An order planner organizes these into work units of nine orders each, nine being the number of totes that fit on a picker's cart. WarehousePro optimizes the pick and transmits the picking tasks to a warehouse employee wearing a wrist-mounted radio-frequency scanner. The scanner displays the pick list on a small screen in a way that moves the picker through the warehouse in the most efficient manner. Orders usually are picked within two minutes, a rate of about 20 seconds per item. "We can turn about 1,400 orders in eight hours with 8 people picking and four people packing," says DeChambeau. That would have required about 50 people under its previous arrangement with Hammond, "which did not have a sophisticated system at all."

Accuracy also is improved. Pickers scan each item as it is picked and complete orders go through a quality check before moving on to packing and shipping.

"The whole warehouse is tremendously efficient," says DeChambeau. "and I have all the information I need to monitor operations. I can go to my computer and find out how many orders have shipped today, what the work flow has been, and how many units of work were completed by each picker, which helps track productivity." Before, monitoring took place after the fact and was dependent on phone, fax and Excel spreadsheets.

"I think the most positive aspects of the whole system are the overall productivity gains and cost savings," DeChambeau says. "There's nothing better than driving down your overhead."


FULLeCOM started in 1996 doing fulfillment for various direct marketers, including television infomercial retailers, such as Body by Jake. E-tail fulfillment is rapidly becoming its primary focus. FULLeCOM recently moved into a new state-of-the-art e-fulfillment warehouse in Ontario, Calif., just five miles from major hubs for both FedEx and UPS. The 250,000-square-foot facility is just as close to the Ports of Long Beach and Los Angeles where much of the merchandise arrives from Asia.

FULLeCOM provides full order tracking, including direct data feeds from UPS and FedEx. The customer will access information through the merchant's site, but it is actually on the FULLeCOM system.

Many customers still want to track over the phone, which they can do through call centers operated by FULLeCOM.

Merchants can do more than just outsource the order-filling operations to FULLeCOM, which as an application service provider (ASP), offers a full array of online support services. Merchants can access all fulfillment activity in real time through what FULLeCOM calls its virtual terminal. Just using a browser, merchants can monitor orders, SKU levels and transaction activity. They can download reports on cost-per-order, transaction volume, revenue and payments information, and virtually anything they could do with an in-house enterprise system.

Until this year, FULLeCOM used systems developed in-house. Because of greatly increased volumes, FULLeCOM is now using new, web-centric e-fulfillment and customer relationship management (e-CRM) software from Industri-Matematik International, based in East Orange, N.J. The web-centric software will allow FULLeCOM to integrate its customer care services, fulfillment operations and ASP offerings in one complete solution.

"We considered a number of e-commerce vendors but only Industri-Matematik offered integrated web customer service and fulfillment software designed for dotcom environments," says John Gioeli, executive vice president and chief logistics officer at FULLeCOM. "Our company is expanding quickly. We foresee outgrowing the fulfillment and customer service systems we put in place just 18 months ago. The e-fulfillment/e-CRM solution can be implemented rapidly and it's the only solution with the proven functionality and scalability to support our current peak order volumes and future high growth."

Outsourcing to a 3PF like FULLeCOM can provide many types of savings, according to Schon. Just by checking the credit information, Schon says, a 3PF can save the merchant about 40 percent.

"All of the bad-credit problems just go away," she says.

Merchant customers that use FULLeCOM's complete end-to-end solution, Schon says, usually can cut the cost per order in half.

"Using our service, the full fulfillment cost is about 15 percent of the selling price," says Schon. "Customers that handle it themselves usually pay about 30 percent. By piecing together a best-of-breed approach, the cost is usually 22 percent."

The non-financial benefits of outsourcing are just as important to the e-tailer, according to Schon.

"There is total accountability with one source of information that is complete and real time," she says. "There are no gaps in the information and no miscommunication between all the parties in order cycle from credit to delivery."

The systems gap
Henry Bruce, vice president of marketing for fulfillment software vendor, Optum of White Plains, N.Y., agrees that this Christmas season will bring major problems for most e-tailers, and perhaps with 3PFs.

"The problems may not be as shocking as last year's, but most fulfillment operators have not made the changes that are needed in terms of systems and technology," he says.

According to Bruce, most e-tailers and 3PFs have failed to recognize the much higher service requirements of online B2C fulfillment operations, which include three elements:

• Piece-picking material handling orientation that allows high-volume, scalable operations for a vast number of SKUs

• Internet-enabled systems that provide the content and information that all parties - including the consumer, the merchant and the 3PF - need to see in real time

• Front-end to back-end integration of systems, so the order can be confirmed while the consumer is still online.

The largest single failure of most fulfillment systems is lack of an available-to-promise capability.

"The consumer needs to see the specific item he wants in terms of size, color and features, and then he must be able to make sure it is in stock," says Bruce.

He says there also must be a delivery option page that allows the consumer to see the costs and transit time for all carriers. Only after the consumer has a firm order confirmation, a definite delivery time and a total landed cost should the order be locked in. Few e-tailer sites offer this capability.

Most e-tailers and 3PFs use batch information today, according to Bruce. He says that this arrangement only works adequately when immediate confirmations are not needed and when three- or four-day delivery is acceptable.

"These batch fees are a real problem for high-service B2C e-tailing sites where expectations are high," says Bruce. "Consumers are paying very high prices for assured confirmation and immediate delivery. They don't want to hear hours after they placed an order that the item is out of stock."

Optum's web-enabled fulfillment software, such as TradeStream, provides all of these capabilities, Bruce says. He points to iFulfillment, a Chicago-based 3PF, as an example of how a start-up company is in a good position to leap-frog competition because it can start from scratch with the latest material-handling systems and fulfillment software.

iFulfillment runs its 350,000-square-foot fulfillment center in Bolingbrook, Ill., with a highly customized version of Optum's fulfillment applications. It will face its first full Christmas season this year with Nordstrom.com as its first major customer. It is now handling Nordstom.com's shoes, but soon expects to handle all the e-tailer's hard lines.

According to Jeff Woods, iFulfillment's vice president of strategy, the entire business was a ground-up e-commerce-engineering project.

"There are no legacy systems," says Woods. "All systems are web-based, so iFulfillment and its merchant customers have online inventory visibility and reporting tools. Even the optimization modules are web-based," says Woods, who adds that merchants can re-order their own product through iFulfillment.

The Optum system provides merchants with a built-in inventory and purchasing management system that shows them what is in stock and what needs to be ordered. Merchants can cut a purchase order from the iFulfillment site.

"These operational efficiencies provide our merchant customers with fulfillment cost savings of 30 to 50 percent," says Woods.

For the B2C consumer, the real-time capability allows them to get online order confirmations and shipping selections.

"The buyer knows the final complete costs at the time of check out," says Woods. He adds that iFulfillment takes online status information from express carriers and creates an online order-tracking screen, which is displayed on the merchant's site.

The greatest consumer benefit of the iFulfillment system is its speed and accuracy. According to Woods, his company can pick and pack a pair of shoes in 10 minutes from the time the order reaches the fulfillment center floor.

He says, "There is one hour from the consumer's click to the moment the order is out the door." Woods claims there has been accuracy in order picking since the operation started earlier this year.

Enter the 3PLs
Outsourcing fulfillment in the business-to-business (B2B) world is a well-established practice. Third-party logistics companies (3PLs) and public warehouses have become a standard element in many companies' logistics networks. It is logical that they would want to be a player in the burgeoning B2C e-tailing market.

Jacksonville, Fla.-based GATX Logistics, one of the largest 3PLs in the U.S., decided in 1999 to get into the fulfillment business. However, the 3PL also realized that this consumer-based business was very different from its normal pallet-in/pallet-out operations for B2B customers.

"We decided we had to start from scratch, so we created a new company," says Tom Scanlin, vice president of market development for GATX eLogistics, which runs its fulfillment operations from a new, dedicated B2C facility in Hebron, Ky. "It is separate from the parent in nearly every way."

"We use the logistics systems and freight management services of GATX Logistics, but everything else about GATX eLogistics is separate," says Scanlin.

The Hebron facility is designed from the ground up to handle high-volume consumer orders that are shipped out as single parcels.

According to Scanlin, GATX entered the B2C fulfillment business because of the opportunity for rapid and profitable growth that this marketplace represents. Total retail sales in the U.S. are around $3tr, according to Scanlin, but e-tailers have only one half of one percent of this volume, or about $15bn. He expects this share of market to grow to about five percent within five to 10 years, which in today's dollars would amount to $150bn.

Of the current $15bn in online B2C sales, Scanlin says only about 10 percent of the fulfillment business is outsourced. He expects this to grow to 50 percent in a few years.

"The operational efficiencies and economics of outsourcing fulfillment are very compelling," says Scanlin, "but only very good operators are going to be able to capture significant portions of this new business."

Scanlin sees at least four reasons why more and more e-tailers will outsource their fulfillment to 3PFs:

1. The complexity of e-tailing fulfillment requires high investment in systems, material handling resources and expertise. Start-up e-tailers have neither the time nor resources. Venture capitalists are impatient for results, he says. The investors have concluded that their money should be directed to making the business grow, while fulfillment is better turned over to specialists.

2. E-tailing is a virtual world. Every e-tailing site requires multiple alliances for handling credit, payment, content, live chat, call centers, shipping, and all of the other functions that consumers have come to expect. It is difficult and expensive for most e-tailers to provide the best services, but customers demand them. GATX eLogistics provides these services through a partnership with e-commerce software vendor Interworld, whose Commerce Exchange software allows merchant customers to greatly enhance their e-commerce capabilities with buyer databases, special files for VIP buyers, credit card handling and merchandizing features. Merchant customers pay only about half of the normal licensing fee for this software because they are piggybacking on the GATX eLogistics license.

3. Delivery costs are a key component to profitability. The e-tailers model substitutes high quality parcel transportation for investment in retail outlets, so every penny that can be taken off that cost is profit to the e-tailer. eFulfillment operators that can establish lower rates and better service agreements with major parcel carriers can significantly lower the delivery costs.

4. Inbound transportation costs are overlooked but significant. Only large fulfillment operators will have the volume and expertise to set favorable contracts with many trucking companies.

There is plenty of competition for the outsourced fulfillment business. Scanlin estimates that there are between 50 and 100 e-fulfillment companies today, including 3PLs that have entered the B2C market, start-up 3PFs and established retailers like J.C. Penney and Fingerhut that take on outside e-tailer clients.

Scanlin believes there are several key performance questions that e-tailers should focus on when making their outsourcing decision.

First, is the facility designed and engineered specifically to handle high volume B2C fulfillment? "Operations that are primarily manual are going to break down." Second, does the facility have state-of-the-art WMS and fulfillment systems that can handle real time picking? Third, is the facility near enough to major parcel carrier hubs to allow late cut-offs for same-day order shipment?

"We have most competitors beat on all of these points," says Scanlin, who adds that his company can save most merchants five dollars on every order because of operating efficiencies and transportation expertise.

"There is no slack in B2C fulfillment," says Scanlin. "Either you get it 100 percent correct, or you have a dissatisfied customer that is likely to be lost forever. You better get it right."

According to Scanlin, consumer orders are picked and shipped within 24 hours, and usually much less. Orders are received through the customer's order processing system, and every five minutes, are queued up and sent to the warehouse. The cube and weight of each item on the pick list is known because they are physically weighed and measured when received. Based on these specifications, the correct box is automatically selected, tagged with an internal routing card and put on the automated conveyer system. The routing card tells the system where to send the box on the picking lines. At each picking station, the routing card is scanned to verify the exact item to be picked. The item is picked and scanned again as it is put in the box, which lets the system know to move the box to the next picking station. The process is repeated until the order is filled. It returns to the shipping station where a shipping label is attached and the order is loaded onto a truck.

One of GATX eLogistics customers is LuxLook.com, a high-end e-tailer of designed accessories, many costing hundreds or thousand of dollars. These high-value items are stored and picked in a high-security area of the warehouse. The items and all related material inserts are placed into the box and sealed in the high-security area before it moves to the shipping area.

The merchant captures order information on his or her web site and messages it to GATX eLogistics every 15 minutes. An order confirmation is sent back to the merchant's enterprise resource planning (ERP) system. When the item is shipped, another confirmation is sent out along with tracking number to both the merchant and to the consumer. Because of the high volumes, data transfers are through a T1 line that is always on. Data is transferred in EDI, flat files, or as XML event-driven messages.

The merchant determines how the consumer can track an order. Some just provide a tracking number and link to the parcel carrier. For others, such as LuxLook, GATX creates a tracking function directly on the merchant's site. Consumers get tracking information automatically just by logging on the site.

Customer ERP systems match the order availability in the GATX WMS system so they are in sync.

Returns are a tiny percent of the orders that GATX eLogistics handles, but there are standard operating procedures for handling the process. Every outgoing order includes a return shipping label and instructions. A customer that wants to return an item for any reason has to call the e-tailer to receive a customer return number, which the customer writes on the box. The e-tailer transmits that number to GATX eLogistics, along with the original order number and the reason for the return. When the returned order is received by GATX, the number is entered into the systems. GATX knows what to expect and what condition it should be in. The product is disposed of or returned to stock according to rules the merchant has established.

One of GATX eLogistics's newest seasonal customers is Seattle-based Gear.com, which is an e-tailer of closeout sports equipment and clothing for outdoor enthusiasts. For Gear, inbound transportation is a major issue. It buys closeout lots from manufacturers and other retailers all over the country. The challenge is to bring the inventory into the Hebron warehouse as quickly as possible and at a low transportation cost. "Inbound transportation comes right out of the margin," says Gear.com's director of systems operations, Chris Woods.

Using the freight management services of GATX Freight Systems and the contracts that it has with hundreds of carriers, GATX eLogistics routes the inbound shipments to Hebron. GATX's inbound transportation capabilities help to find the fastest, lowest cost route.

Receiving accuracy is a key performance indicator for all of its customers, but especially with an operation like Gear that deals in closeouts.

"You cannot go by what the manifest says because they are rarely correct," says GATX's Scanlin. "We open every box we receive, weigh each item and scan it into the WMS system so our data is correct from the start.

"Any mistake at receiving will eventually show up as an order error, so we want to avoid this at the first opportunity," says Scanlin, who adds that meticulousness in receiving is a critical operation that few fulfillment operators pay enough attention to.

Gear.com switched to GATX eLogistics earlier this year from a local fulfillment operator in the Seattle area "Gear.com was losing money on 70 percent of its orders," says Scanlin. "Now they are making money on 90 percent of them."

The major problem was that each order was taking two to three days to fill. The only way to meet customer service commitments was to ship via second-day air. That added cost ate up all the profit. Now orders are turning around in one day or less and can be shipped via ground. The transportation costs are cut in half, and service is at least as good.

Order confirmation is another key factor for Gear.com. It carries about 15 thousand SKUs in stock at any one time, but as a closeout operator, the item selection is constantly changing.

"Usually, once an item is out of stock, it's not going to be available again," says Woods, who adds that this small ordering window makes it vital that customer orders are confirmed. "There is no opportunity to back-order."

GATX eLogistics integrated with Gear's SAP ERP system, which allows it to verify that orders can be filled. This is handled in near real time with frequent data transfer between the ERP system and the GATX eLogistics WMS system

Scanlin says he sees this Christmas as a breakthrough opportunity for all 3PFs, and for GATX eLogistics in particular.

"Every e-tailer knows what will happen if they repeat last year's debacle," says Scanlin. "We have sold our customers on the basis that we are going to help them meet customer expectations, regardless of volume and demand. We know if we perform as flawlessly as we believe we will, GATX eLogistics will have a major marketing advantage over competitors for future fulfillment business."

The 800-pound Gorilla of Online Toy Sales

With 1999 Christmas sales revenue of $152m, eToys is the uncontested leader in the online toy sales market.

In fact, it takes the next three competitors' sales combined to equal the Christmas revenue figure for the Santa Monica, Calif.-based e-tailer. But 2000 must be an even better year for eToys. Like most dotcoms, eToys is under tremendous pressure from investors to improve revenue and margins and to prove its long-term viability with high levels of service. Prospects look better for eToys than for many of the other online toy e-tailers, most of which had a disastrous Christmas season last year. According to industry analysts, sales revenue in the fourth quarter Christmas season for eToys should increase by nearly 70 percent over last year and reach at least $240m. Just as important, eToys seems to have solved the customer service problem that plagued most of the toy e-tailers last year. Unlike most of the nine major online toy e-tailers in business last Christmas, eToys claims to have provided a high level of customer service. According to an eToys spokesman, the company delivered 99 percent of all orders in time for the holidays. Other figures provided by industry analysts peg the service level at about 96 percent, but in any case, it greatly exceeded the figures for other toy e-tailing competitors. Not surprisingly, at least four of them have closed their doors since last Christmas.

One reason for eToys' expected higher service levels this year is a new state-of-the-art, two-million-square-foot distribution center (DC) in Blairs, Va. With this new DC on the East Coast and its existing one on the West Coast, eToys will be able to provide faster delivery to customers. It should also be able to lower shipping costs since UPS, FedEx and other parcel carriers price their services according to zones.

Last year, eToys used a substantial amount of third-party fulfillment, but a company spokesman says that outsourcing was always a bridging strategy.

"Our distribution and fulfillment is 100 percent in-house now, which gives us the control we need," says the spokesman.

According to Toby Lenk, eToys president and chief executive officer, having two state-of-the art DCs provides the infrastructure needed to meet the high service expectations of online Christmas shoppers. He says that the company has been poised for a very large holiday season and has been rehearsing for peak volumes since early summer.

``Over the last year, the entire organization has been intently focused on putting in place the capabilities that will allow us to aggressively pursue a successful holiday season, to solidify our market leadership and to meaningfully advance our march to profitability,'' said Lenk. ``Bottom line: We are well positioned and highly prepared to continue to deliver the best customer experience in online children's retailing.''

The new East Coast DC is driven by a warehouse management system provided by eSYNC International of Toledo, Ohio, called eWMS. It is a highly automated distribution solution consisting of a radio frequency-based WMS, integrated with slat shoe and multiple tilt-tray sortation systems. The facilities distribute thousands of items to eToys' customers across the country. eSYNC was responsible for both information systems and operational project management as well as overall systems development and deployment.

Both facilities are ready to deliver the goods for the holiday shopping season. The order and fulfillment process is similar at the two DCs.

Once the order is taken and cleared by the web site, the eToys enterprise system makes a decision from which DC in the network to ship the order. The default setting is to ship from a DC closest to the destination in order to keep shipping charges low and to speed delivery to the customers. Once the DC is chosen, the order is sent to the local warehouse management system at the DC. Orders are printed and picked regularly throughout the day. As the order is picked and packed it is checked multiple times for accuracy. The system compares each product placed into the order with a digital computer image on the packing monitor. It also uses barcode technology to scan the unique UPC code on each product to insure the right item was packed. Additionally, when all items are packed into the box the conveyance system weighs the package and compares it to the expected combined weight for the items in the package. If it doesn't match, the package is checked again. Finally, the eToys customer service group randomly samples outbound packages for accuracy and presentation. All of these checks and processes help achieve some of the highest order accuracy rates in the business.

A customer can be assured that the product is in stock before an order is placed. The system allows the customer to look at virtually real-time inventory available in each DC. The e-tailer has one of the lowest returns rates in the e-commerce business and is in the low single digits in terms of percentage of sales. According to an eToys spokesman, the low returns rate is attributable to very few shipping errors and complete product and shopping information when the customer is making a selection.

In the event a customer wants to return an item, every order is shipped with a pre-paid merchandise return label. The customer completes a return form on the back of their invoice and applies the return label to the box. When the box arrives at the eToys DC, the returns department processors takes the action requested by the customer. eToys will either credit the customer's account, reship the same item or a different one, or cancel the order. There is no restriction on when an item can be returned.