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The Hub of a New Universe
iQVC creates a distribution hub to optimize fulfillment of irregular-sized orders of its growing product offerings.
For the rest of the February 2001 issue of CRM magazine please click here
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VC has been quite successful transforming its on-air brand into an online force. Launched in September 1996, iQVC (also known as QVC.com) did $166 million of business in the 12 months through September 2000, and was recently named the top general merchandiser on the Internet by Forrester PowerRankings. Driving these numbers is a larger choice of product offerings and an elaborate network of suppliers tied to QVC through CommerceHub, a virtual warehouse fulfillment system to deliver them.

iQVC expanded the QVC product offerings to grow its business. "If you look at the television, there's only so many minutes in a day, so there's only so much product you can offer," says Stephen Hamlin, vice president of operations for iQVC. "iQVC strategy since the beginning has been about choice, allowing the customer to buy anything, anytime." Although QVC proper has operations and distribution centers in three eastern states as well as Texas that handle fulfillment for all on-air products, the broader scope of iQVC's offerings made adapting QVC's established infrastructure impractical.

So iQVC focuses instead on relying on a network of 300 drop-shipment distribution partners to fulfill all orders for non-QVC product. "The reality is there are a lot of distributors out there who can do single unit pick/pack distribution, and they have new avenues to big retailers that they never had before," says Frank Poore, president and CEO of Clifton Park, N.Y.-based Commerce Technologies, developers of CommerceHub. On the other hand, insourcing inventory is neither a guarantee of bottom-line success or of real-time inventory visibility--two lessons Amazon.com, which operates a more traditional inventory infrastructure, has learned the hard way.

CommerceHub supplies QVC and its vendors with a central communication point to handle all shipment orders. What is significant about CommerceHub's infrastructure is that it acts as an invisible translation tool, converting all manner of XML, EDI, Web form or even custom file data transmissions from one party into a format that can be digested by the other. This eliminates the need for iQVC to impose a common data standard on hundreds of companies or work out hardwired data connections with each of them.

"It allowed someone like us, a huge vendor with legacy systems, to communicate with a lot of people," says Hamlin. "What the goal is and what our standards have always been is to meet QVC's standard in the virtual warehouse model, and to be able to do that, you need good visibility of the transaction."

Virtual Warehouse

When implemented properly, drop-ship or "virtual warehouse" arrangements are advantageous to retailers that want to offer a broad product base that would be impractical to stock in a central location. Not only does the system eliminate overstock risk, but there are also certain financial advantages, such as a small amount of float on customer revenue between when the order is placed and when the supplier bills the retailer. A traditional warehouse retailer pays up-front or on 15- to 90-day terms.

But drop-shipping is not without its risks, particularly when manual processes like faxed orders are widely used. "There are a hundred and ten things that can go wrong when you do business that way," says Hamlin, who has been working with drop shipments for a quarter century. Hamlin says that for the first three years of operation, "There was a lot more manual intervention going on. It was very difficult to deal with that many suppliers electronically."

Before implementing CommerceHub, iQVC had a limited view of order status, particularly unconfirmed orders that could indicate anything from a misplaced fax to an out-of-stock item. "Now, if we send an order down to a supplier and they don't acknowledge in a certain period of time, we're told immediately," says Hamlin. CommerceHub enforces iQVC's standards for order confirmation and shipping, and iQVC staff are immediately notified if a vendor seems to be disregarding an order, allowing them to get on the phone to resolve the problem. "It improves our customer relations--we can deal with problems and make sure the goods are delivered to the customer on time."

Commerce Technologies began working with iQVC in 1999 to solve specific logistics infrastructure issues, including integrating order processes for specific vendors and devising an integrated packing slip that contains its own return label. Poore saw an opportunity to turn a major headache into a one-to-many network not just for iQVC and its vendors, but also for any drop-ship retailer and convinced iQVC to buy into the project. "There was nothing like it at the time in the marketplace," says Hamlin. "We started working on this from the ground up."

Implementation

Adding vendors to CommerceHub has been relatively painless. iQVC has been steadily rolling out the system since a successful 15-site pilot during the 1999 holiday season. "We identify the vendor, let the vendor know that we are interested in this solution, and the rest is done by CommerceHub," says Hamlin. That process involves evaluating the vendor's current order processing protocol and either agreeing on a common format or creating a translator for CommerceHub based on the vendor's requirements. If the vendor is low-tech (working through phone and fax exclusively, for example) CommerceHub sets up a Web interface.

According to Hamlin, the hurdles to compliance have been minimal. "There's always a little bit of hesitation because they don't really understand it, but it really saves them money, it's more automated for them and they can see the advantage," says Hamlin. Especially for those vendors who already have some form of automatic order processing, the differences are minor since CommerceHub handles the details of converting one company's format to another. At present, iQVC has roughly half of its vendors on CommerceHub, with a full rollout expected by the second quarter of 2001.

All of iQVC's CommerceHub-connected suppliers include iQVC-branded packing slips in shipments, meaning that the customer has no idea a third-party distributor fulfilled the transaction. Although Poore mentions more than once that even the smallest of cottage manufacturers can be set up with a Web interface in 15 minutes, branded packing slips and all, Hamlin says that iQVC has not changed its standards for vendor partners. "We don't go to garage operations, because they can't handle our capacities," he says.

Because CommerceHub pipes all of its data into QVC's existing billing and CRM environments, customers never need concern themselves with how iQVC fulfills their orders, as QVC call center agents can track the confirmation and shipping status of products from any of the iQVC drop-ship sites. "If someone calls, they can get any answer they want, just as if [the product] were coming out of our own warehouse," says Hamlin.

Benefits

"What we've learned is that we've really improved communications with some of the vendors who were more problematic," says Hamlin. He specifically targeted those vendors who had been relatively less reliable to bring them online with CommerceHub first, hoping to solve the biggest problems early in the process.

Neither Commerce Technologies nor QVC would disclose the costs associated with the implementation and maintenance of CommerceHub. Commerce Technologies charges a subscription fee to QVC and its suppliers for the integration and linkage services and also charges a flat per-transaction fee whenever iQVC pushes a purchase through the system.

"Since we've started, we've seen the average ship times dwindle, and that's based on what we're doing with CommerceHub because everything else is equal," says Hamlin. While shipping and fulfillment policies haven't changed, Hamlin says that going forward, iQVC vendors will be required to use CommerceHub "in 99 percent of the cases."

CommerceHub has also helped iQVC hold the line on administrative costs. While Hamlin has a staff of up to 14 people keeping tabs on order acknowledgement and fulfillment through CommerceHub as well as a few people working on bringing new vendors into the system, "I didn't have to hire other resources this year for that area because of this solution," he says. The final dollar reckoning remains to be done. "I haven't gone through that exercise yet, but I know it's paying handsomely for us."

Hamlin says that he is extremely pleased with the experience as a beta and now a production customer of CommerceHub. "For us to turn over our virtual warehouse to something like this, we wouldn't have done it if they hadn't been extremely responsive," he says.

Poore points out that while iQVC was the inspiration and flagship customer, CommerceHub was never designed specifically to meet iQVC's requirements exclusively, but for use by other retailers and vendor groups, too. "iQVC gave us a real-world proving ground," he says.

That real-world proving ground has turned into an efficient, customer-focused fulfillment network. Given the choice, Hamlin doesn't want to go back to doing business with faxes and prayers. "It's not like sending things into a black hole and not knowing where they're at. That's a tremendous asset."

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