The bad news
Thirty percent of the pots were broken upon arrival and wrong accompanying
materials were stuffed inside the packages. Often the shipping boxes were too
small or too big and sloppily taped together. White plastic-foam peanuts to
protect the pots during transport were dirty, as if they had been reused. The
poor presentation made the pot look second-rate and gave the appearance that Garden.com cut corners.
Worst of all, people were told late shipments were due to a shortage in product availability -- even though the
warehouse was full.
O'Neill asked his outsourcer what the heck was going on. "His excuse was that there was too much 'velocity
of change,'" O'Neill says. Velocity of change is when time-sensitive items are in constant flux; that is, they're
being added, dropped, received, shipped and returned in real time.
By featuring the pot on the Web site, the logistics landscape shifted overnight. Demand for the pot increased
while other products fell by the wayside. The outsourcer wasn't able to transition more trucks, shipping boxes
and people to handle the fragile pot.
In other words, the outsourcer wasn't able to manage the speed at which e-commerce flowed. Customers
clicked over to Garden.com's competitors.
Still learning
Few logistics outsourcers have figured out how to do e-commerce fulfillment well. While transportation,
warehousing and IT consulting firms converge on this space, they're still learning.
Consequently, Internet companies are stuck between the proverbial rock and hard place. Most of them need
to outsource logistics because they lack the resources to do it themselves. On the other hand, companies that
choose to outsource risk serving up a poor customer experience -- a death knell in the e-commerce world.
Logistics outsourcing, which traditionally covered warehousing, transportation and freight forwarding services,
is undergoing a massive transformation. E-commerce and technologies such as EDI, the Internet and
supply-chain software are providing big opportunities and even bigger challenges for outsourcers.
For starters, e-logistics providers -- companies handling e-commerce fulfillment -- depend on integrated IT
systems and complex software to manage the dynamic flow of products.
Better information also reduces inventory throughout the supply chain, enabling companies to react quickly to
market changes.
It's a bottom-line buster. "In the telecommunications equipment sector, we're seeing best-in-class performers
-- those that use technology well -- succeed with less than 35 days of inventory, compared with a benchmark
of 50 days from the mid-1990s," says Steve Geary, chief analyst at Performance Measurement Group, a
subsidiary of management consultants PRTM. "Trends are similar in other industries."
A new distribution
But better supply-chain visibility changes the face of physical distribution. Since companies don't need to
stock up on as much inventory, e-logistics providers must store and transport unit-sized shipments rather than
traditional pallet-sized shipments. This requires a complete overhaul of business processes.
And in e-commerce's business-to-consumer market, studies reveal as much as 30 percent of sales are being
returned; e-logistics providers must build a reverse-logistics division tied into their overall operation.
Logistics-business process-outsourcing spending in the U.S. is expected to grow from $67 billion in 1999 to
$114 billion in 2003, according to International Data Corp. Moreover, the supply-chain software market is
growing at a 30 percent annual clip, expected to surpass $18 billion in 2003, reports AMR Research.
"There's just a lot of play in supply chain outsourcing these days, especially for high-tech companies and
e-tailers," says Larry Lapide, vice president and service director of supply-chain strategies at AMR Research.
"These companies need to concentrate on their core competencies … when you have standardized
components, the competitiveness is in marketing and sales."
Choose your allies carefully -- a risky bandwagon
While logistics
companies
want to
manage your
e-commerce
fulfillment
operations,
jumping on
this
bandwagon
is risky.
Like sharks in a feeding frenzy, outsourcers are aggressively converging on this space. Deep-pocketed
transportation companies have spun off logistics divisions: primarily United Parcel Service Logistics Group
and FedEx Global Logistics.
They're spending millions to ramp up services and grab a majority of the market before
competitors even get on their feet. In addition to their logistics divisions, UPS (UPS) and
FedEx plan to deliver business units later this year targeting the boatload of dotcoms that
desperately need e-logistics services.
UPS's business unit, called UPS e-Logistics, will offer a package of services derived from
the high-end, customized logistics services currently being offered by UPS Logistics
Group. E-Logistics already has about 50 employees, "and growing like a weed," says
Mark Rhoney, president of UPS e-Ventures, the division that oversees e-Logistics. "If you
have a product and a Web site, then we'll take care of the rest of your business."
Big IT services firms such as IBM Global Services (IBM), PricewaterhouseCoopers,
Andersen Consulting, Unisys (UIS) and Electronic Data Systems (EDS) are also
weighing in. They bring a high degree of technical savvy, proven consulting experience, and
impressive customer portfolios.
But they also must search for ways to fill gaps in their logistics offering, often contracting with third-party
logistics companies to handle material and distribution services.
Desperately seeking upward expansion
Lastly, the field is chock-full of traditional logistics outsourcers seeking upward services expansion.
Most organizations posing as e-logistics providers sprung from trucking or facilities management companies.
Here's fair warning: These "new" e-logistics providers have operated for years on razor-thin profits, and many
are unable to make the huge capital investments necessary to become world-class providers of IT services,
reports AMR Research.
At least that's what Garden.com found out: After only three months, O'Neill dumped his logistics outsourcer.
He quickly changed directions, investing heavily in the development and rollout of a homegrown supply-chain
application. This system eventually supported more than 70 suppliers and 20,000 products shipped directly to
the customer, essentially cutting out the middleman.
Today, Garden.com's virtual supply chain enables delivery of fresh, live plants without the hassle of first
storing and caring for them in an outsourcer's warehouse.
The downside is that Garden.com takes on additional operating costs. For instance, individual products are
delivered separately but customers demand lower shipping charges when buying in bulk -- that means
Garden.com has to eat the difference.
Also, Garden.com must continually grease its supply-chain engine. "We've invested in the area of seven figures
to design, build, enhance and implement our supply chain software solution," says O'Neill, adding that up to
25 percent of Garden.com's overall operating expense is used to maintain and improve the system.
"Experience" isn't
O'Neill's lesson learned: While logistics companies want to manage your e-commerce fulfillment operations,
jumping on this bandwagon is risky. While outsourcers tout a boatload of logistics experience, many still lack
vital IT skills and a basic understanding of how e-commerce works. In the end, nobody likes being someone
else's guinea pig.
To be fair, many companies lack resources to build or manage a logistics solution themselves. High-tech
stalwarts and Internet startups are pouring exorbitant amounts of capital and manpower into product
development and marketing, and there's little left over. For Michael Gambino, founder of Bestroute.com, the
decision to outsource logistics was a no-brainer -- he just didn't have the cash to build it.
Earlier this year, Gambino wanted to sell hard-to-find electrical components over the Web. He sought funding
for his startup company, locked down suppliers, designed a Web site and began a marketing campaign.
The only thing missing was the logistics piece.
But building a distribution center would have tied up millions of dollars in initial funding, while tacking on
another three months before Bestroute.com could start selling products.
Gambino also loathed the idea of hiring an army of workers to install and manage a complex warehouse
management system necessary to handle his company's 70,000 items.
With his target date looming, Gambino pressed on. He scheduled a meeting with UPS Logistics Group at its
Atlanta headquarters, hoping that a name-brand player might have its e-logistics act together.
Little did Gambino know that he and his business plan would be the ones judged worthy or not.
UPS Logistics Group, whose customers include Nike.com (NKE) and Ford Motor (F), screens dotcoms to
gauge their shot at stardom -- it doesn't want to be stuck servicing a loser.
Winning after all
Shortly after the meeting, UPS Logistics Group officials told Gambino that they would provide a full range of
distribution, warehousing, fulfillment and shipping management services for his company. A contract was
drawn in February, and Bestroute.com planned to open its virtual doors in May.
"For a big company in a new space, UPS Logistics Group was really on the ball in terms of technology and
moving things along," says a thankful Gambino.
Indeed, Bestroute.com was one of the lucky ones. Most outsourcers are unable to provide e-logistics services
-- or at least, not very well.
In terms of service, there's a huge quality gap between the handful of top-tier logistics providers and the rest
of the pack. Simply put, these top providers can't service everyone.
"Oh man, my phone rings all day from dotcoms wanting our services," says Joe McCarty, CEO of FedEx
Global Logistics.
Choose your allies carefully -- you better shop around
Finding an e-logistics service provider that can handle all your needs isn't easy. Most companies claiming to
be such providers use outdated or inadequate information systems. They lack IT sophistication.
"A great-looking Web front-end is easy to design," says Chris Newton, supply-chain analyst at AMR
Research. "The real challenge is to back it up with a system architecture that allows seamless information to
flow between every member of the supply chain."
Companies searching for a logistics service provider must use a critical eye. They should look for a provider
that leverages state-of-the-art supply-chain management software, e-commerce and tracking and tracing
environments such as EDI and the Internet. In other words, logistics service providers must be able to
demonstrate the following:
- The resources and willingness to invest in advanced supply-chain software and remain on the leading edge
of IT.
- The ability to provide real-time logistics information in an integrated environment and across all modes of
transportation.
- An evolution toward real consultancy by offering logistics strategy formulation, business process redesign
and organizational change.
- Global reach and resources coupled with localized knowledge of regulations, taxes, and culture.
