Supplier Direct Fulfillment: Accelerating e-Commerce Growth And Profitability

Written by: Bob Chase, VP of Consulting Services, Fry Inc.

Competition for consumer spending dollars continues to intensify even as consumers are expecting more from retailers, within and across channels. Nowhere is that competition fiercer than in e-commerce, where competitive shopping is literally a matter of keystrokes. To rise above the competition, online retailers need to better serve their existing customer base, attract new customers and become more cost efficient.

Retailers know that product pricing and availability are key decision drivers for winning a customer's purchase dollars. Moreover, consumers tend to spend most of their money at few retail sites and having a broad selection helps increase customer order values and promote retention. Addressing these three major customer influence factors — assortment breadth, competitive pricing and product availability - presents major financial and operational hurdles. The result is a balancing act in which retailers must consider 1) capital expenditures to buy and carry inventory; 2) operational capabilities to fulfill orders; and 3) margin pressure to maintain competitive pricing. Without an operating model to overcome these hurdles, online assortments become constrained, ultimately limiting the channel's ability to better serve and broaden the customer base.

Drop shipping - or supplier direct fulfillment (SDF) - cuts through many inventory related costs to fuel e-commerce growth and profits above industry trends for retailers who leverage it properly.

Why is SDF so powerful for e-commerce? The answer is as simple as the concept: it helps retailers offer more products and meet the demands of the online channel in a cost effective way. With a well-orchestrated supplier direct program, retailers can speed time-to-market on new products and maintain customer loyalty by offering a consistent, yet wide range of products, without the associated inventory investments and risks. The results are incremental growth and profit with greater customer conversion rates for both existing and new customers.

• SDF promotes growth and profitability through these key value drivers:Enables unlimited assortment expansion opportunities by eliminating capital, space and logistics constraints.
• Reduces capital/operational costs associated with buying and carrying inventory.
• Increases control of promotion pricing by reducing margin erosion from inventory liquidation.
• Improves operational productivity through fulfillment rationalization to minimize delivered costs. It shifts appropriate SKUs to SDF, where operational costs are variable and allows internal operations to focus on predictable, fast-moving SKUs.

SDF has a faster ROI compared with traditional supply-chain strategies for growing assortments. The majority of SDF investment costs occur during implementation and initial ramp-up of the supplier network. These costs are relatively low, compared to increasing distribution capacity and procuring inventory to support expanded assortments. SDF is also typically a faster to initiate and scale than traditional fulfillment methods because the fulfillment network is virtual.

SDF is not without its challenges. With the added benefit of eliminating inventory carrying costs comes an inherent loss of direct control over fulfillment operations. The supplier who owns and fulfills the product has a direct touch point to that retailer's customer and their ability to deliver on the promises the retailer made to the customer directly impacts customer experience and retention. Without the proper policies, training and program administration, a direct fulfillment network can become unmanageable and a hazard to the retailer's brand equity. Retailers looking to enhance an existing SDF program or launch a new are advised spend time building an SDF infrastructure that can successfully scale without sacrificing the customer experience.

These 10 tenants are key enablers of a profitable, scalable, and stable SDF program:

1. Utilize best-of-breed SDF technology partners — Standardizing SDF order brokering connections improves transaction efficiency, provides consolidated order transparency, performance / exception monitoring, and allows the retailer to focus on driving the business.

2. Ensure SDF is invisible to the end customer — SDF suppliers are an extension of the retailer fulfillment network and the process should be seamless to the customer. Retailers should institute policies to promote and protect their brand image and customer relationship.

3. Institute SDF program education and orientation for suppliers — Each retailer's SDF needs are different as is the suppliers capabilities; set suppliers up for success by providing clear program guidelines, expectations and instructions prior to launch is critical.

4. Confirm product line profitability for SDF — Not all products are ideal candidates for direct ship; rationalizing the SDF assortment helps retailers get the most value out of their fulfillment channels.

5. Develop cohesive supplier launch plans — Prioritizing implementation plans based on the supplier's product line revenue potential, its seasonality and ease of implementation will help maximize the value contribution of suppliers and ensure internal resources are utilized productively.

6. Follow a rigorous supplier onboarding process — Suppliers need to prove they can meet program requirements by successfully completing end-to-end testing scenarios. Predefining a standard process with key milestones promotes setup efficiencies and post-launch stability.

7. Mange the SDF supplier network by exception — Scalability is a key component of realizing SDF benefits. To efficiently manage SDF retailers need to leverage technology tools manage exceptions by severity across suppliers.

8. Measure and communicate performance — The best way to manage SDF suppliers is to empower them to manage themselves. Setting performance standards and consistently measuring and communicating those KPIs is critical to maintaining a high-performing network.

9. Leverage technology to manage SDF supplier data. Operating an SDF network requires a close supplier relationship where more information needs to be collected, updated and accessed. Leveraging technology tools to consolidate, quickly access and manage that data improves internal resource productivity and timeliness of information.

10. Build a dedicated SDF team - SDF programs are highly scalable but successful ones don't run themselves. The SDF team is not only the operations team but also serves as a key liaison with merchandising and an escalation path for customer service.

SDF delivers an attractive ROI value proposition and is an integral part of leading e-commerce strategies. When leveraged effectively it removes the financial and operational constraints associated with buying and managing inventory in traditional supply chains and increases merchandising flexibility to profitably broaden and deepen assortments.