Knowledge Partnerships for E-Fulfillment

The next time a Papa John's pizza truck drives by, things may not be what they seem. The driver is actually a UPS employee. Papa John's International of Louisville, Ky., runs more than 2,000 pizza restaurants. It makes the pizza, but UPS Logistics (a division of United Parcel Service of Atlanta) delivers the cheese, dough and tomato paste to the stores.

Like many other companies, Papa John's has realized that order fulfillment and logistics can be either a drag on resources or a source of efficiencies. Back-end partnerships between vendors and delivery companies exemplify how some companies are extending their enterprises to turn the demands of e-business fulfillment into competitive advantages.

To make this possible, third-party logistics providers have expanded the scope of their services far beyond moving boxes. These days, shipping companies are reviewing their clients' business plans and fine-tuning inventory levels. Distribution warehouses not only store products but also host activities previously handled by the manufacturer. Information technologies make it possible to manage inventory levels within distributed warehouses and track products as they move.

Mass media and advertising have hyped the virtues of e-commerce while overlooking the physical nature of much of what is ordered. When e-retailers like eToys.com and Toys R Us failed to deliver goods in time for winter 1999's holidays, the importance of inventory logistics and order fulfillment became painfully apparent. To many e-business professionals, such failures indicate a need for sharing knowledge.

The holiday e-commerce meltdowns can be blamed in part on merchants that merely forwarded orders along, assuming that suppliers would have the right inventory to ship directly to customers. In addition, the labor-intensive process of preparing and shipping masses of single gift packages for home delivery caught many suppliers unprepared.

Customers placed orders on Web sites assuming they would provide as accurate a picture of what was in stock as a store shelf would. But some merchants did not have systems in place to track their inventory levels in real time. As a result, they were forced to inform customers after the fact that their purchases wouldn't arrive in time for the holidays.

The result was a serious backlash: Unhappy customers griped publicly, and the media reported the glitches and failures. Many vendors belatedly realized that managing the customer relationship meant controlling their inventory.

Inventory risks
Keeping large caches of inventory may be a safe way to assure that products are available, but it's expensive. Yet compensating for low inventory levels by scheduling more frequent transportation may not cost less.

To avoid problems in filling toy orders by Hanukkah and Christmas, Toysmart.com built an order fulfillment center in a 126,000 square-foot converted steel mill in Worcester, Mass. to hold more than 75,000 educational toys. As shipments arrived, handheld devices scanned the packages' barcodes and transmitted the data via radio frequencies to the inventory and order fulfillment application, PureCommerce from Yantra Corp. of Acton, Mass.

The system made it possible for Toysmart.com to know what products were in the warehouse and to reflect that information on its Web site. It also prints the mailing label or sends order information to drop-shippers (suppliers who don't keep their inventory in the Toysmart.com warehouse). It coordinates the sharing of inventory and ordering information among all parties.

Toysmart.com stocked up its products well in advance to prepare for the holiday rush, avoiding collaboration with last-minute suppliers. The company didn't try to manage a virtual inventory or choose to outsource its logistics. The strategy worked: Web shoppers found only items stocked in the warehouse were for sale, and the order fulfillment systems came through. Toysmart.com won a customer service award for online retailers from the Patricia Seybold Group of Boston for its performance during the peak selling season.

But Toysmart.com lost roughly $25 million during the nine-month period that its risk-averse owner, Walt Disney Co., retained majority ownership. In a move that several analysts attributed more to a corporate culture clash than poor business practices, Disney closed Toysmart.com in May.

Although Toysmart.com was able to fulfill its customer orders by maintaining a large warehouse of goods, this approach does not suit all sectors. In industries such as telecommunications and computers, inventory gets obsolete fast. Few things erode the bottom line more quickly than unsellable goods.

Moving with dispatch
The alternative--holding small inventories in multiple sites and relying on rapid transit--isn't exactly cheap. "Logistics is always a trade-off between efficient transportation and inefficient inventory," says Ronald Ratliff, executive director of the Logistics Institute at the Georgia Institute of Technology in Atlanta. He notes that shipping companies such as Airborne Express, FedEx and UPS have made it possible to move goods swiftly. They've created tracking systems that monitor the transportation of goods and are happy to deliver orders piece by piece. However, Ratliff adds, these services carry premium costs.

Nonetheless, relationships have advantages. As partner companies fine-tune their logistics arrangements, lines between organizations can begin to blur. UPS employees check the temperature of the rising dough, for example, and wear pizza delivery uniforms. Strategic functions also become shared duties. For example, UPS Logistics estimates how many loafers MyFavoriteShoe.com of Seattle ought to keep in UPS warehouses.

UPS Logistics maintains 7 million square feet of warehouse space and provides traditional warehouse management services. It also transports goods by truck or airplane or arranges for seagoing freighters or railroads to do it. However, according to CIO Jay Walsh, "It's the technology services that have enabled changes to our business."

Logistics and order fulfillment have not traditionally been valued as a source of business advantage (see the sidebar "Logistics Evolves"). The first improvements to logistics planning occurred within the warehouse, streamlining basic function of picking ordered products and packing them for shipping. The advent of manufacturing planning systems (MPSs) enhanced factory logistics for the enterprise. Supply chain management carryied information integration out to the suppliers' customers. Now a few companies provide collaboration software for logistics and trade partners involved in international shipping.

Package-tracking applications gave logistics another major boost. Knowing where an item is in the transit cycle shows the customer that the shipper is on top of things. For example, Ford Motor Co. turned to UPS Logistics for help in designing a network that minimizes the time cars spend traveling from factory to dealership.

Collaboration can also work at the inventory planning stage. With MyFavoriteShoe.com, a UPS Logistics team translates growth forecasts into realistic inventory levels.

Conventionally, companies have viewed their business plans and sales growth forecasts as corporate secrets. Companies are finding that the bottom-line benefits of sharing traditionally guarded business assets such as with a shipping partner make such hoarding counterproductive. In logistics, "85 percent of the effort is an exchange of knowledge and information; 15 percent is actually moving product," says Greg stock, vice president of marketing for Vastera of Dulles, Va., which sells a portal for collaboration among trading partners, suppliers and carriers.

Handling unwanted business
Back at the warehouse, other activities suggest that logistics is more than on-time delivery. To deal with product returns, FedEx, UPS Logistics and others have gotten into reverse logistics.

In this scenario, the transport company picks up unwanted or defective products and repairs or repackages them for delivery to another customer under a separate order. This, according to John Fontanella, research director for AMR Research in Boston, is one of the most overlooked parts of the product life cycle. "It's... largely ignored because it's often the result of errors, poor judgment in design or over-eager sales," he says. Once a product is purchased, a company records the revenue from the sale and is reluctant to remove it from the books.

Holding the shipper responsible for returns also makes it responsible for the customer experience at its nadir: when something goes wrong. Putting that much responsibility in the hands of the shipper isn't just about collaboration. Judy Jarrell, FedEx's e-commerce strategy advisor in Memphis, Tenn., calls it a matter of trust. "True supply chain management requires a degree of information flows for inventory, production, design and development." she says. To feel confident about ceding control of it, a company needs a compelling reason, such as transportation cost savings.

According to Fontanella, the transportation costs involved in picking up and returning an unwanted or defective product at single-item shipping rates constitute the largest portion of the total expense of handling returns. If the company that transports and stores the returned items also can fix them and send them out again, the manufacturer can save money, not to mention customer grief.

Myriad ways now exist to manage inventory and transportation costs, including who carries the responsibility. Creative collaborations between partners have blurred the lines of responsibility for the shipping, the warehouse, the inventory levels and sometimes even the customer. Thanks to strategically shared knowledge and creative partnerships between suppliers, retailers and shippers, the logistics and order fulfillment process is finally getting the respect it deserves.