DM News' Deliver: Trends in Order Processing and Fulfillment

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A good way to start this article is to define fulfillment, since many people have different definitions. I define fulfillment as order processing on a specific software platform such as catalog, one shot, continuity or negative option, as well as the shipping of the product to the customer.


Why do you need specific software platforms? Many companies advertise all-in-one systems. However, competition is so fierce among companies for the customer's disposable income that failure to process orders on the system that matches the marketing approach results in the marketer being unable to obtain the information needed to compete.


How the economy changed. Before 9/11, the U.S. economy and the direct marketing industry enjoyed 10 years of growing prosperity. A rising stock market, dramatic increases in real estate values, low-priced consumer goods manufactured overseas and the dot-com boom enabled vast numbers of Americans to improve their standard of living.


People spent their stock market profits and refinanced their homes to take advantage of low interest rates and high real estate values. High-quality, low-cost clothing made in places like China, Sri Lanka and Romania as well as electronics like digital cameras, laptop computers and televisions from South Korea and Japan flooded the marketplace at prices consumers found irresistible.


With the bursting of the dot-com bubble, the catastrophic events of 9/11, the recession that followed and overall poor stock market performance, consumers reined in their spending. Lower response rates and reduced spending by consumers meant less prospecting - up to 80 percent less for some marketers - as well as fewer orders to fulfill and stagnation in the growth of house files.


Certain segments of the industry were hit by changing consumer-buying behavior. Book clubs were hurt when big-box stores such as Wal-Mart, Kmart and Barnes & Noble increased product discounting. Amazon joined the fray by offering rock-bottom prices and delivering goods via one of the best order processing and shipping companies in the country: itself. The days of selling books at full price with high shipping and handling charges ended.


Sweepstakes marketers were decimated when regulatory agencies challenged their excesses and took their consumer protection campaign to the public. Consumers stopped responding to promotions, and fulfillment houses processing sweepstakes responses felt the blow. Continuity and negative option, a tried and true DM concept, lost favor as consumers used the Internet to access a vast choice of merchandise on a 24/7 basis.


The reduced prospecting and changed consumer behavior have resulted in excess production capacity for direct marketing services providers including list brokers, printers, lettershops and fulfillment services providers.


The challenges are many for the fulfillment industry. Marketing companies experiencing drastically lower volumes have insisted that higher volume pricing be maintained if they are to survive. This has placed tremendous financial pressure on providers of outsourced fulfillment solutions, and weaker and less efficient fulfillment houses have fallen by the wayside. Nevertheless, an excess of fulfillment capacity remains for the available work. This reality is creating the following trends:


Individual marketing organizations no longer can support in-house operations. Reduced revenue has resulted in a loss of capital outlays and systems upgrades at companies running in-house operations. The lack of investment, combined with the loss of overall volume, has driven in-house fulfillment expenses through the roof and forced many companies to shut their in-house operations or try to enter the third-party fulfillment business by taking on outside work. Very often, the knowledge of account management and cost required to serve outside clients are grossly underestimated and only add to these organizations' financial woes.


Many companies force outsourced fulfillment operations to assume management tasks once handled by in-house fulfillment coordination staff. Companies are reviewing their operations to reduce headcount wherever possible in order to bring operating costs in line with revised revenue projections. These cost reductions have seen much of the marketing and fulfillment expertise that formerly resided within marketing companies replaced by younger, less experienced personnel.


These staff adjustments mean fulfillment services organizations are required to take on more of the fulfillment coordination work and do more training of their clients' employees. In some instances, fulfillers are asked to station account service personnel in client facilities to attend meetings and do the jobs of former in-house employees. The proactive fulfillers are reacting to this work shift by adding expertise to their client service and account management teams.


Fulfillment operations must meet Amazon-quality service levels. Amazon has established new levels of excellence in the ease, speed and accuracy of order taking, credit card authorization, customer communications, pick and pack, delivery and returns processing. Today's fulfillment services companies are measured by "The Amazon Standard" when they seek new business or negotiate a contract renewal.


Driven by consumer expectations and client company demands, fulfillment companies are forced to move faster and faster. To achieve this speed, they also must spend more time training their clients to provide information in a timely manner and, in many instances, replacing current computer software and redesigning fulfillment facilities to achieve the needed efficiencies.


Sarbanes-Oxley compliance. A rash of corporate scandals over the past several years can be thanked for the extra cost involved with having fulfillment computer systems being certified as Sarbanes-Oxley compliant. Many legacy systems at some smaller fulfillment operations cannot be reprogrammed cost effectively for compliance, thus placing your business at risk. This is another reason for the outsourcing trend as companies go outside where the systems are more modern and the cost of "SOX" compliance can be spread over several client companies.


Privacy, personal data protection, theft of files. In the past two years, the theft of customer information has reached such levels that the government constantly introduces new regulations while credit card companies rush to encrypt data in new ways to ensure privacy, limit theft/financial loss and create a level of comfort for customers who are afraid to provide credit card information online. Compliance and certification have added another cost to the business that fulfillment houses must pass along.


Shift to e-commerce ordering. You cannot pick up an industry publication without seeing an article about the rise in volume of e-commerce ordering month over month or year over year. The Internet unquestionably has become a major sales channel and probably will become the dominant channel as companies improve their search engine capability.


Any marketing company hoping to do business needs a Web site that is customer friendly, well designed from a marketing viewpoint and interconnected with its fulfillment systems so customers know what is available for purchase. The more proactive marketing and fulfillment companies have recognized this and spent the money to develop this expertise.


The right fulfillment system for the marketing promotion concept. With the strong competition for the customer's disposable income, a company cannot continue to run its businesses on computer systems that have not been designed for that particular marketing concept. Failure to process your business on the proper software results in marketing not receiving the critical analysis needed to be competitive in that particular marketplace.


Continuity and negative option systems are an example. Look through the industry ads and you will see many fulfillment companies advertising continuity systems. Investigate the detail and you will find many of them try to place continuity work on their one-shot systems by using the add-on sale feature.


The problem with this approach is that your client does not receive the customer attrition report that's critical to a continuity program. As marketing people recognize this, they are being more specific with their requirements, and companies with the fully developed computer systems are winning more of the business.


Database marketing. Knowing the lifetime value of your customer is critical to marketing today. Millions have been invested in developing in-house systems that have never been turned on. Others that are operational are too costly to operate in today's environment or are on old, outdated platforms that cannot be upgraded.


The trend is to hire a company that has a track record in operating databases for companies and has helped those companies improve sales by better identifying where their profitable sales reside. Most companies simply can't afford the cost of the talent needed to run in-house databases effectively on today's operating margins. The trend is to work with fulfillment companies having open systems that can feed centralized databases wherever they reside.


Partnerships for the client's benefit. How do you serve your clients in today's environment and continue to grow with them? Some forward-thinking fulfillment services companies recognize they are experts in a few areas and only average in others. They also are seeing their clients move into multichannel marketing while crossing over from direct to consumer into business to business, or vice versa. Companies that already were in those channels and lines of business find that one area of their business suffers from inferior systems execution and poor reporting. The companies that tried to build multipurpose systems found out they could not maintain the cost of operation at today's margins.


With fewer discretionary dollars to pursue, marketing organizations are competing even harder for their share of consumer spend. Though the Internet's growth as a purchase channel is one of the few bright spots in direct marketing, it also requires investment in talent and software to establish Web-based processing that is customer-friendly. Without this capability, you cannot survive in the fulfillment business today.


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