Editorial

 

You can have the best-known brand in the world. But in the business-to-consumer (B2C) world, if you don’t have the right e-commerce infrastructure, you can find yourself quickly running out of capital and, from there, out of business. A strong brand is necessary but not sufficient. Customer growth is not enough. Inventory availability is not enough. Fast delivery is not enough. Lots of cash availability will help, but who has sufficient capital today?

 

Meeting (many would say exceeding) consumer expectations is the key to success in the B2C world. “To do that, you have to have the right mix of capabilities,” says Paul Evanko, St. Onge Co. “The right balance of good management of capital, fundamental management leadership skills, scale and, yes, branding. But this balance varies by industry.”

 

And the right balance seems to change almost daily. Thus, successful companies focus on flexibility.

 

 

 

B2C E-Commerce: What Works, What Doesn’t

 

Agility, quickness, flexibility and simplicity — when it comes to B2C, these are the tools of successful “e-tailers.”

 

by Leslie Langnau, senior technical editor

 

“In the early days, many people in on-line fulfillment made a gigantic mistake by trying to anticipate what type of customer was going to come to them and then what type of equipment and support would be needed,” says Frank DiMaria, divisional president, APL Direct Logistics. “They tried to predict the market. But these people always find that their assumptions are wrong.

 

“The most successful companies today are flexible,” DiMaria continues. “For example, 80 percent of all work in the warehouse is the movement of product. It’s not the actual picking of product. Yet so much energy and time are focused on automated picking processes. Lots of managers selected carousel picking or pick-to-light systems, and they invested big dollars. But when they did that, they took away two things. They took away their flexibility to design an infrastructure to support customers, and they increased their capital burn rate substantially.”

 

B2C is far more variable in sales volume than B2B. Thus, companies must watch their fixed costs and carefully choose how to invest capital in their infrastructure. One of the reasons many early B2C ventures failed was because they went too far too fast, rather than evolving their business. The “poster child” example of this, of course, is Webvan.

 

“The evolution of your logistics system should be based on volume,” says Evanko. “A retailer may start out with a store-pick model, then progress to a modified combination store and small distribution center - what you might call the hybrid model. From there, the next step is to a fulfillment center. Webvan skipped the first two steps and incurred a lot of capital and overhead to do that.” And we all know the end result.

 

“The volume fluctuations in direct marketing are extreme,” agrees Robert Mann, associate partner, supply chain management of the consultant company Accenture. “The ratio between your lowest-volume week and your highest-volume week could be 20. We’ve seen this over and over again. This fact doesn’t seem to lend itself well to a model or business that’s saddled with a lot of fixed costs.” 

 

And fixed costs are easy to accumulate when you’re trying to accommodate peak volumes. But you can quickly find yourself falling into a ditch. The advice of successful e-commerce masters is don’t try to design your systems for peaks. “Automation and material handling systems have a finite capacity,” says Mann. “No one can afford to invest in enough capacity to handle that worst-case day.” This is where arrangements with others in the supply chain can pay off.

 

Come to order

 

Across all Web sites, regardless of company, there’s an argument that says that ordering should be a standard process. Consumers resist learning new forms and ordering procedures. And they resist going to new sites partly because of the need to learn new navigation processes. That resistance translates into lost sales.

 

“Objectively, it’s a fairly small barrier, at most five or ten minutes of additional time to go into a new site,” says Mann. “But it’s a significant enough barrier that it inhibits consumers from doing so. Research shows that they will not overcome any significant barrier to getting to that first order.”

 

That means having a clear tree structure or some powerful yet easy way to navigate to a particular product category or product. Displaying whole pages of products on Web sites is falling out of favor. The main reason is it just takes too long to download pictures and information. For many e-tailers, catalogs solve the problem, regardless of the theory that says companies should use only the on-line medium. Research is showing that more people make their purchase decisions based on what they see in a mailed catalog, then go to the Web site to place the order.

 

Research is also showing that consumers want to enter in just enough information to assure delivery of the order. No marketing surveys disguised as order-entry, thank-you. 

 

Availability

 

“Successful e-commerce managers are focused like a laser beam on moving and turning inventory,” says DiMaria. “Items that don’t sell, or are a problem, successful companies eliminate to quickly cut their losses.” Successful e-tailers turn inventory between four and eight times a year, at least.

 

Successful e-tailers have learned from brick-and-mortar retailers. “Brick-and-mortar retailers understand that the floor is precious,” adds DiMaria. “Anything on the floor that doesn’t move, they get it off because it’s costing them. They mark it down and get rid of it. Many merchants in the on-line space, though, feel they don’t have to guess right on inventory. They buy everything and hold it until they sell it. They hold onto it almost with a death grip because they lack the sensitivity to know what it’s costing them.”

 

Also, those companies that are successful in e-commerce B2C don’t buy large amounts of inventory at a time and they don’t proliferate the number of SKUs.

 

With inventory levels under control, the next issue is how much to tell consumers about what’s in stock. E-tailers use several solutions ranging from displaying everything available to removing a product from the Web site if it’s temporarily out. But there are drawbacks to these options. Displaying the full quantity available is generally not necessary. First, there’s the problem of accuracy. Many companies use multiple inventory programs for various reports, and reconciling them to achieve an accurate count is nearly impossible.

 

A second problem is one of perception. Consumers may perceive a small quantity in stock as a bad sign. Too large a quantity may influence the consumer to wait for a sale. 

 

“All companies really need to do is tell the consumer if they have the item or not,” says Mann. “If you tell them you don’t have the product, but that you will get it, you will often get an order you wouldn’t have otherwise. If you don’t tell them you don’t have it, or worse yet, you don’t even show the item, you can guarantee you won’t get an order.”

 

According to a recent Accenture study, 2001 Holiday Season e-Fulfillment, e-tailers have improved in the area of ensuring product availability for Web orders. In-stock status here was 97 percent.

 

Fulfillment and delivery

 

“Successful e-commerce players have DCs that are very automated around the fact that most on-line orders consist of one or two items,” says Mike Terrell, senior vice president and general manager, IM-Logistics. RFID and weighing are two popular ways to help ensure order pick accuracy. Dynamic kitting is another technique.

 

For the most part, fulfillment is an area that just about everyone — B2C, B2B and brick-and-mortar — has few problems with. Delivery, to the door, is where present B2C players are focusing their efforts.

 

Here’s a look at the current state of delivery, according to the Accenture study. Of the orders their consultants placed for Christmas delivery, 95 percent of the deliveries were correct and complete. Ten percent of the orders, though, did not arrive before January and were canceled.

 

“There’s an old truism in direct marketing,” says Mann. “Deliver the product to the consumer before the second weekend.” Brick-and-mortar retailers reduced average delivery times from 7.0 to 6.5 days. E-tailers increased delivery times by one day to 8.2. Catalogers also increased delivery times from 7.1 to 7.8 days. According to the report, delivery performances in the 2001 study were poorer than in 2000. The report cites the events of September 11 as a possible explanation, noting that the U.S. Postal System and small package parcel services had to deal with increased security concerns, which affected the U.S. delivery network.

 

Most deliveries in the U.S. are made by UPS (48 percent) and the U.S. Postal Service (36 percent). Also, 74 percent of the companies studied sent e-mail shipment confirmations to consumers, which usually included a tracking number.

 

Perfect deliveries, as defined by Accenture to be on time or early, damage free and with correct product and paperwork, improved from the previous year’s study. They increased from 27 percent to 52 percent. The most common answer for what went wrong was not meeting expected delivery date. Incorrect paperwork was the second most common reason for an imperfect delivery. “Incorrect paperwork frequently occurred when Web sites outsourced order fulfillment to third parties,” says the report.

 

Having the execution, the operational excellence to be able to do what you promise, is an important part of delivery. “It’s almost worse to make a promise and not keep it than to not make a promise at all,” says Mann. And consumers’ expectations of delivery are due to promises.

 

While delivery is in general good, it could be better. Most companies, e-tailers included, do not track shipped orders to the consumer’s door. Instead, it’s assumed that if they don’t receive complaints from consumers, everything went well. However, shipments don’t always reach their destination. And a lot of the time, human error is the reason. For example, a delivery person may read the address incorrectly and drop packages on the neighbor’s doorstep. 

 

Some companies are working to close this gap. Part of the reason is because they know how much it cost to acquire the customer, and the last thing they want is to lose that customer because of a delivery problem.

 

The solution is a proactive approach to delivery. Rather than get reports days, weeks or a month later, delivery confirmation is done in real time. This requires a tracking system that actively checks what’s going on, and relays those data back to the e-tailer. Should a problem arise, then e-tailers can address the problem.

 

One of the best ways to address it is to offer the consumer options regarding the delayed or missed shipment. Let them choose how they can best be made happy.

 

On return

 

“Returns are more expensive than shipping it out,” says Terrell.

 

Accenture notes that about 40 percent of the Christmas orders they made for their survey were returned. Based on numbers alone, it’s important in B2C to make returns easy.

 

And successful e-tailers are doing so. Fewer companies require pre-approval for a return. And many include return instructions and labels for consumers.

 

In addition, though, returns offer an opportunity to turn cost into revenue. Retailers often use their on-line sites to help liquidate product. “There’s a great opportunity here,” says DiMaria. “You can potentially get 60 percent to 70 percent of the retail value this way, which is more than the cost value in some cases.”

 

Fast-twitch muscle

 

“In B2C, like a fast-twitch muscle, you need to be able to react to consumer desires,” adds DiMaria. “You still have to know material handling basics, you have to manage inventory, and you need flexibility and a synchronized environment from front to back.” These are the core capabilities of successful e-tailers. SCF

 

 

 

Case History

 

Delightful Logistics

 

Is it possible for a pure-play e-tailer to handle mass customization? Alex Zelikovsky, vice president and chief logistics officer at Reflect.com, thinks so. He’s in charge of the entire back-end infrastructure and supply chain development for the on-line beauty supplier. “For us, the products do not exist until the consumer creates them on line,” he says. “We’re the only company in the beauty-care industry that has a mass-customized end-to-end supply chain.”

 

Part of Reflect.com’s success is due to its efforts to delight its consumers with the on-line experience and the product. “We take the promises we make to our consumers very seriously,” says Zelikovsky. “They are strategic decisions defined by our board of directors.

 

“At every link of the supply chain,” he continues, “at every step, we gave a great deal of thought on how this experience will be viewed by the consumer and how we can delight her at every step of her experience. As an on-line business, a great deal of that delight lives in logistics, and I’m speaking of logistics from a military standpoint. It touches every point of your operations.”

 

On the Web site, a woman answers about 10 questions regarding her beauty requirements. This process determines the formulation of the product, which comes from a broad but predefined range of options. After those questions, she is given a choice of final packaging and can even name her product. That’s the custom aspect and is handled in the distribution center in Cincinnati.

 

The order goes into the manufacturing facility in New York. It was specially built to suit the e-tailer’s needs, making as few as 20 units per run. The equipment is laid out and designed so operators can change SKUs within minutes. “Our productivity on a variable-cost basis is almost the same as if you were to make 50,000 units, says Zelikovsky. “We’ve been able to produce 30 different products on one line in one 7.5-hour shift.”

 

The company keeps a finite amount of products and raw material on hand, but that means rapid replenishment is crucial. Zelikovsky looks for suppliers who can turn small lots of raw material orders around in 24 hours. “Thus, we’ve had to find a supply base that is flexible and agile, and that can give us options on how to procure and when,” he says.

 

“It took us six months to a year to establish a supply chain that was efficient from both service and cost standpoint and executed on our business model.”