(Aug 10, 2000)

Chapter 13

Order Fulfil l ment , Logistics, and Supply Chain Management

13.1 The Y2K EC order fulfillment problem

13.2 Order fulfillment in EC; Front office, Back office – an overview

13.3 Basic concepts of supply chain and its management

13.4 Typical problems along the supply chain in EC

13.5 Solutions to SCM problems

13.6 Information technology and SCM

13.7 EC along the supply chain

13.8 Trading markets and exchanges

13.9 Non-supply chain related partnerships

13.10 Outsourcing logistics: the FedEx model

13.11 Software support and integration along the supply chain

13.12 Integrated software solutions: from MRP to ERP

13.13 Can virtual retailers survive?

13.14 Managerial issues

Real World Case#1 Quantum

Real World Case#2 Dell computers customer service

Learning Objectives

After studying this chapter the reader will be able to:

1. Understand the role of order fulfillment and back-office operations in EC.

2. Describe the process of order fulfillment.

3. Understand the concept of the supply chain, its importance and management.

4. Describe the problems of managing the supply chain and the use of innovative solutions there.

5. Describe the need for integrating the information systems of the front office and back offices.

6. Trace the evolution of software that support activities along the supply chain and their management.

7. Understand the relationships among ERP, SCM and electronic commerce.

13.1 The Y2K EC order fulfillment problem

While the entire world watched the transition into the 3rd millennium happen without any major Y2K problems, the EC B2C industry in general, and the e-toys retailers in particular, experienced their own transition problem at the end of 1999.

According to many newspapers, TV, and EC research companies, reports, (e.g., see Fortune, Jan. 24, 2000 pg.2), overall satisfaction with online shopping significantly declined in December 1999 and January 2000, driven by consumer frustration with late deliveries, and with before, during, and after purchase customer support. In general, e-Tailers struggled to meet demands from last minute shoppers. It became clear that during the period of peak demand, the order fulfillment infrastructure of most e-Tailers was pretty weak.

The situation was especially critical in the toy business. In fall 1999, a fierce competition developed among the online toy retailers, who promised to pay delivery charges and even gave $20 discount coupons. Toyrus.com averaged 1.75 million unique customers a day and eToys was flooded with 1.9 million unique customers a day. The number of orders far exceeded the projections. On December 1999, Toysrus.com notified customers that only orders made prior to Dec. 11 would come in time for the holidays. After that, the customers would have to pay a premium for priority shipping. A few days prior to Christmas, Toysrus.com notified some customers that they may not get the toys they ordered by the holiday, offering them $100 coupons as a compensation. EToys and other e-Tailers experienced similar problems. Amazon.com was forced to ship orders for several products in several shipments instead of one, increasing the expenses of Amazon substantially.

13.2 Order fulfillment and Logistics: an Overview

Introduction

The opening case illustrates to us that taking orders over the Internet could well be the easy part of B2C EC. Fulfillment to customers’ door is the sticky part. As a matter of fact, many e-Tailers have experienced fulfillment problems since they started EC. Amazon.com, for example, which initially operated as a totally virtual company, added physical warehouses in order to expedite deliveries and reduce order fulfillment costs, and Etoys started building such warehouses in 2000, after the YK2 toy problem. Woolworths of Australia, a large supermarket that added online services, had serious difficulties with order fulfillment and delivery of fresh foods, and had to completely reengineer its delivery system (see details in Chapter 1, ending case).

Several factors may be responsible for the delays in deliveries. They range from inability to accurately forecast demand to ineffective supply chains of the e-Tailers. These will be discussed in section 13.4. Several of such problems exist in offline businesses. One factor which is characteristic to EC is that EC is based on the concept of “pull” operations which begin with an order , frequently a customized one. This is in contrast with traditional retailing that begins with a production to inventory , which is then sold to customers (see Figure 13.1). In the pull case it is more difficult to forecast demand due to lack of experience. Another factor is that in a B2C pull model, the goods need be delivered to the customer’s door while in brick-and-mortar retailing, the customers come to stores. Before we analyze the order fulfillment problems and describe solutions, we need to introduce some basic concepts.

Major Concepts

Order fulfillment. Order fulfillment refers not only to providing the customers with what they ordered and do it on time, but also to providing all related customer service. For example, the customer must receive assembly and operation instructions. This can be done by including a paper document with the product, or by providing the instructions on the Web. (A nice example is available at www.livemanuals.com.) In addition, if the customer is not happy with a product, an exchange or return needs to be arranged. Thus, while order fulfillment is basically a part of the back office operations, it is strongly related to the front office operation as well.

Front office operations. Front office operations refer to all the activities related to sales, marketing and customer contacts. Specifically, in front office activities of EC we include advertisement, promotions, help in product customization, provision of detailed product information, other CRM activities and order taking.

Back office operations. These include order fulfillment and all the related logistics and procedures. It also includes all the necessary finance, accounting and other internal administrative activities.

Logistics. There are several definitions of logistics here are some:

1) The definition of logistics adopted by the Council of Logistics Management (USA) is: “the process of planning, implementing, and controlling the efficient and effective flow and storage of goods, services, and related information from point of origin to point of consumption for the purpose of conforming to customer requirements.” Note that this definition includes inbound, outbound, internal, and external movements, and return of materials and goods. It also includes order fulfillment. However, the distinction between the logistics and order fulfillment is not always clear and the terms are sometimes used interchangeably.

Other definitions are:

2) The aspect of military science dealing with the procurement, maintenance, and transportation (of military material, facilities, and personnel).

3) The management of the details of an operation.

4) All activities involved in the management of product movement, that is, delivering the right product to the right place at the right time for the right price.

The process of order fulfillment in EC

In order to understand why there are problems in order fulfillment it is beneficial to first look at a typical fulfillment process of EC, which is shown in Fig. 13.2. The process starts on the left when an order is received. Several activities take place, some of which can be done simultaneously, while others must be done in sequence.

These activities are:

1) Making sure the customer will pay:

Depending of the payment method and prior arrangements, an investigation must be made regarding the validity of the payment. This activity may be done by the company’s finance department and/or a financial institution (bank, credit card brand such as Visa). Thus, the required payment information needs to be transferred to the checking mechanism and sometimes to an outsider. Then, a feedback to finance, accounting and to the customer follows. The interfaces between the involved parties and the lines of communication must be both effective and efficient. Any delay may cause a shipment delay, resulting in a loss of good will or, more important, a customer.

2) Checking for in - stock availability

Regardless if the vendor is a manufacturer or a retailer, an inquiry needs to be made regarding stock availability. Several scenarios are possible here, involving both the material management and production departments, as well as outside suppliers. Here again, the order information needs to be connected to the information about in-stock availability. Furthermore, if an item has been promised for a delivery it should be deducted automatically from the in-stock inventory.

3) Arranging shipment s

If the product is available, it can be shipped to the customer (otherwise go to Step #5). Products can be digital or physical. If the item is physical and it is readily available, packaging and shipment arrangements need to be made. Both the shipping (packaging) department and internal shippers or outside transporters may be involved. Digital items are usually available since their “inventory” is not depleted. However, a digital product, such as software, may be under revision and thus unavailable for delivery at certain times. In either case, information needs to flow among several partners.

4) Insurance

Sometimes insurance for the shipment is needed. Both the finance department and an insurance company could be involved and again, information needs to flow frequently not only inside the company, but also to and from the customers and insurance agents.

5) Production

Customized customers' orders will always trigger a need for some manufacturing or assembly operation. Similarly, if standard items are out of stock they need to be procured. Production can be done in-house or by contractors. An in-house production needs to be planned for. Production planning involves people, machines, financial resources and possibly suppliers and subcontractors. Manufacturing involves the acquisition of materials and components. The suppliers may have their own suppliers, frequently in several tiers. The actual production facilities may be in a different country from where the company headquarters or the retailers are. This may further complicate the flow of information and communication.

6) Plant services

In the case of assembly and/or manufacturing, several plant services may be needed, including possible collaboration with business partners. Services may include scheduling of people and equipment, shifting other products’ plans, or working with engineering on modifications.

7) Purchasing and warehousing

If the seller is a retailer, such as in the case of Amazon.com or e-Toys.com, purchasing from manufacturers is needed. Several scenarios may exist. Purchased items can be placed in warehouses, such as what Amazon.com does with its best selling books. But Amazon does not stock books for which only a few orders are received. In such a case, special deliveries from the publishers or other sources must be made. Not only is an effective information flow is needed, but also appropriate receiving and quality assurance of incoming materials and products must be done. Once purchasing and production is completed, shipments (Step #3) are arranged.

Several other activities are related to order fulfillment:

8) Demand forecast

In the case of non-customized items, such as toys, a demand forecast must be done in order to determine appropriate inventories at various points of the supply chain. Such a forecast is difficult in the fast growing field of EC. In the case of customized products, it is necessary to forecast the demand for the components and materials required for fulfilling customized orders. Demand forecast must be frequently done with business partners, along the supply chain, as will be discussed later on.

9) Accounting

In many cases the accounting department is involved in generating invoices and/or receipts, auditing internal transactions and inventories, monitoring payments and updating the books. Tax and customs issues are also handled by the accounting department. Therefore, information flow and communications must be done for every transaction.

10) Contacts with customers

The salespeople need to keep in constant touch with customers. Starting with notification of orders received and ending with notification of a shipment or changes in delivery dates. These contacts are usually done via e-mail, frequently generated automatically.

11) Returns

In some cases customers want to exchange or return items. Such returns can be a major problem since up to 30% of all items purchased are sometimes returned to a vendor (in the USA). The movement of returns from customers to vendors is called a reverse logistics.

From the above process it is clear that order fulfillment involves both flow of goods (physical or digital) and a substantial flow of information among several units inside and outside the EC vendor. Therefore, the process needs to be connected not only to existing internal information systems (such as the legacy system), but also to the information systems of the suppliers, customers and other business partners.

The order fulfilment processes may vary, depending on the product and the vendor. There are also differences between B2B and B2C activities, as well as between the delivery of goods and services, and between small size and large size products. Furthermore, additional steps may be required in certain circumstances such as in the case of ordering tropical fish (see application case 13.1), where a wholesaler is involved.

Application Case 13.1: Can tropical fish survive online logistics?

Petstore.com (Emeryville, CA.) offers more than 1,000 types of rare tropical fish and other exotic sea life, to be ordered online and delivered to customers’ doors, in several countries.

Here is how the system works:

Step 1: An order is placed on the web from anywhere in the U.S., Canada and other countries where the company delivers. A payment by credit card is required. (Just click on the shopping cart of www.petstore.com.)

Step 2: Using B2C order fulfillment software from Yantra Corp. (Acton Mass; www.yantra.com), the order is transferred to Petstore.com’s warehouse in Inglewood, CA. There, the order is checked to see if the fish is in stock in the company’s high tech filtered ocean water aquarium. If the fish in not in stock, a special order is made electronically, using a wholesaler in Long Beach, CA.

Step 3: The Wholesaler places the order electronically, with a supplier in the South Pacific island of Fiji, usually with other orders.

Step 4: The supplier finds the desired fish in Fiji, places it in a bag with filtered ocean water mixed with Oxygen that protects the fish from temperature change, etc., and sends it on the next commercial airplane to the wholesaler.

Step 5: The wholesaler sends the fish to Petstore.com’s warehouse, where the fish is carefully repacked.

Step 6: Federal Express overnights the fish to the customer. The customer receives a confirmation of the shipment and a copy of the credit card payment transaction.