How to Avoid Failure in Your Fulfillment Center

Is your fulfillment center stable? If you are not sure, you should find out.

The dot-comedy of errors — weak business plans, profitability not being a primary goal, poor cash management, customer service as an afterthought — during the past few years has resulted in the closing of more than 200 start-ups. Those companies were worth $1.5 billion in investors’ money last year alone. The closings have placed a major burden on many of their vendors and suppliers that embraced the upstarts when they first appeared so promising.

In 1998, my fulfillment firm signed its first dot-com account. It was an exciting time. This was a major retailer that decided to set up a Web site that would be driven by its retail store advertising.

The company started conservatively, beginning with 100 SKUs consisting of mostly hard-to-find items or products with a special interest. This online retailer did well and became profitable by the fourth quarter of that year.

By spring 1999, it said it would go public the following year. In order to do this, the company’s executives thought it was important to gain market share — a lot of market share.

The company was going to throw more than $80 million at this venture within the next eight months with the intent of shipping from 1,000 orders a day to shipping more than 150,000 in one day during its peak shipping time. Yet this had to happen with less than six months to set up and prepare.

We told our client that no fulfillment company could accomplish this aggressive initiative appropriately and that if any fulfillment company said it could be done, it was not being realistic.

We knew the first company that told our client it could accomplish such growth in so short a time would get the job. We advocated splitting the orders by alike-product lines and fulfilling them out of multiple distribution centers. Sure enough, a company told our client that it could do it and this company got the job. Of course, things did not go well, and the result was that the fulfillment company went out of business. The retailer subsequently decided to split out the work to multiple sites.

In three short years, the dot-comedy of errors has manifested itself by taking e-commerce from a business with limitless potential for your fulfillment center to one that has brought near catastrophe.

This is not to say that every company doing business on the Web, or wishing to do so, is a joke. On the contrary, there are fine businesses that operate with sound business plans and bright futures. Those in the best shape combine an online presence with physical retail stores.

The rise of e-commerce in the late 1990s also brought with it a rise in third-party fulfillment companies. Many of them relied heavily on e-commerce accounts. They are now trying to retool and maintain viability.

With all of the announced retail closings, many third-party fulfillment companies are struggling. If you are looking to hire a third-party fulfillment company, or you already use one, now is a good time to take its temperature and determine whether it is stable. This is what you can do:

Start with a client listing. Determine which dot-com companies are on it and check each one for financial stability. What percentage of their business do they represent?

Look for longevity. While this is no absolute guarantee to financial health, companies that have been around for a long time know what it takes to stay in business and are less apt to take on financially risky clients. In addition, veteran companies have seen all different types of clients and can adapt to your business better.

Look for flexibility of services. Does the fulfillment provider have the ability to expand and contract its labor force and space requirements as your needs fluctuate? Does it have strong technological expertise? Can programmers adapt different electronic protocols to suit your needs?

Check client references. Ask for client references and call them to hear firsthand about the fulfillment company and how it handles its clients. Has the client been pressured to pay invoices sooner than in the past? Has it laid off a significant number of employees recently?

Ask for a reference list of its suppliers. Again, check to see how well it pays invoices. Has it been paying slower or does it pay on time?

Five years ago, it seemed that no one had heard of the term third-party fulfillment. We were the guys in the background with little to no notoriety. We had good accounts, things were stable and our clients were happy. The Internet came along and e-commerce became the rage. Third-party fulfillment became glamorous. Upstart companies sprouted throughout the country to satisfy the need.

Unfortunately, many of them learned that it was not as easy as it looked. Poor service was commonplace and customers became unhappy. Unhappy customers do not buy many products. Dot-coms never recovered, money ran out, business failures went up. This has had a ripple effect on their vendors and suppliers by weakening them.

Do not allow your company to become a victim of the dot-comedy of errors. Ensure that your fulfillment center is experienced, proactive, flexible and convenient. In today’s environment, it pays to be sure.

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