May 2000 | Commentary | IT Matters

E-Commerce Changes Rules for Back-End Operations

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Prior to 1999, every aspect of back-end support operations for the direct marketing industry was tailored to meet the typical cataloger's needs. In the 1970s and 1980s, direct marketing was limited to the mailbox, and order processing and fulfillment operations were designed to meet the catalog or direct mail customer's demands. The costs and requirements for information systems, fulfillment operations, inventory management, and transportation functions were limited by technology and developed exclusively to meet the catalog customer's expectations.

Consumer catalog orders are generated over a 12-week selling season, with some orders arriving one year after mailing. Inventory planning is based on historic patterns of sales and procurement with sufficient lead time to forecast needs, buy and transport products to the fulfillment center, and fulfill customer orders.

Merchandising on the Internet, however, has changed the rules. E-commerce support operations learned some hard lessons in 1999, and were challenged to predict and accommodate the new demands placed on all aspects of operations.

Direct marketing operations providers are now rethinking the process from order acquisition to package delivery. Some e-commerce marketers are leading the way in creating new customer expectations by determining the exact day an order will arrive at a customer's home. Internet marketers have the advantage of quickly changing product offerings to ensure rapid fulfillment of in-stock items, and online access to shipment status.

Delivering what you say you will, when you promise it, has become the most critical success factor in developing repeat customers.

Rethinking the Fulfillment Process

Mature fulfillment operations with large-scale investments in automated storage, multi-item picking, packing, and sortation systems are finding that a state-of-the-art approach to the catalog business is not as effective in meeting e-commerce customer demands.

Traditional catalog fulfillment facilities are designed to accommodate an average order of 2.5 items from an inventory of up to 1,200 average SKUs per catalog. Products are purchased in bulk without packaging. Order picking and packaging systems are designed to combine multiple items into one shipment. Inflexible systems, available dock doors, staging space, unloading/reloading capacity, and material handling resources are all constraints to high-volume processing of prepackaged single-item orders.

Fulfillment centers must create the flexibility to accommodate the extreme highs and lows of single-item, prepacked customer orders. The challenge is to change from a multi-item, pick-pack and warehousing operation to more of a crossdock operation.

Additional dock doors, increased unload/reload capacity, staging areas, and high-volume material handling, labeling, and shipping are essential. Traditional methods of demand forecasting and inventory planning are not yet effective for Internet sales. True demand, including lost orders when items are out of stock or removed from the offering, is difficult to determine based on Internet activity.

Increased demands are being placed on product suppliers and carriers to perform in a much shorter procurement cycle. Online vendor inbound shipment tracking and advanced receipt processing will become a requirement.

New Systems Development

Take a hard look at mature mainframe systems before investing in new development. Making heavy investments in programming to keep up with changing demands for processing and communications may not pay off if you're not creating a flexible, low-cost system that is able to take advantage of new programming technology and high-speed hardware.

Look at new systems development with the belief that most of your accomplishments will soon be obsolete. New programming technology and inexpensive, high-speed hardware are making it easier to invest in throw-away applications designed to meet an immediate need followed by change.

The challenge is to create an information management environment that allows for rapid, low-cost development of new applications with easy access for all.

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