Getting Online Products to Their New Owners

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Like many small-business owners, Hanna and Mark Lim gave little thought to fulfillment until they had no choice.

For the husband-and-wife owners of Lollacup, a maker of specially designed sippy cups, the moment of truth came about 36 hours after a segment about their company was shown in April 2012 on “Shark Tank,” the ABC reality show. At the time, the Lims, parents of young daughters, were handling their own fulfillment — the packing and shipping of products ordered online — from their Pasadena, Calif., living room.

After the show was broadcast and their daily orders doubled to 800, the Lims decided something had to change. “We had boxes piled everywhere,” Ms. Lim said. “We were begging friends and family to come over and help, bribing them with wine, and we still couldn’t keep up.”

It was then that they made a choice common among early-stage e-commerce vendors: they decided to outsource their orders to a third-party logistics provider, known in the business as a 3PL, in exchange for a percentage of revenue. In this case, that was about 3.5 percent of each retail sale and 7 percent of each wholesale order, not including delivery costs.

The challenge of fulfilling orders is one of those problems that all e-commerce companies want to have, until they do, at which point it can swallow margins, alienate customers and even sink a business if not managed carefully. “In a world where customers have more choices online, most businesses realize you need to be able to get your product to them quickly and cheaply to stay competitive,” said Bob Halpin, a consumer solutions consultant with United Parcel Service, who helps U.P.S. customers improve their fulfillment operations.

The pressure on small businesses to manage fulfillment costs stems from expectations in the marketplace generated by large retailers, especially Amazon. The online giant has 40 large fulfillment centers around the United States that it uses to offer free two-day shipping to its Prime subscribers, and it is now building five new facilities that are expected to enable it to deliver many items the day they are ordered.

Some smaller e-commerce sites have responded with something of an if-you-can’t-beat-them-join-them attitude, turning to Fulfillment by Amazon, a program that lets them use the retailer’s state-of-the-art distribution system to ship items not even sold by Amazon. But it typically charges more than a standard 3PL provider, about $6 per sale for a product with the approximate size and weight of a sippy cup.

Other businesses treat fulfillment as something of an existential exercise, one subject to constant reappraisal and revision. Several months after the Lims signed on with their 3PL provider, for example, they took another look at the arrangement. Not only were they spending about $8,000 in monthly 3PL fees, they were enduring far more shipping mistakes. They priced other options, and they realized they could improve quality control and save money by shifting final assembly to their manufacturer and bringing inventory and shipping back in-house, this time to a 2,500-square-foot warehouse staffed by one new employee.

“We’re probably going to save about $50,000 this year doing it this way,” Ms. Lim said. “Once we went the 3PL route, it could have been easy to say, O.K., that’s done. But instead we kept questioning and evaluating. We still are.”

While no two in-house fulfillment operations are the same, certain principles apply. In most successful operations, warehouse space is divided into a section for bulk inventory and an area where product can be found quickly to fill orders, a process known as pick-and-pack. One trend Mr. Halpin said he had noticed in recent years was the heightened sophistication of the off-the-shelf software products that are used to manage aspects of the process. At Lollacup, for example, the company’s online store is powered by an e-commerce package from Shopify, which exports inventory data to the Lims’ QuickBooksprogram, and interfaces with ShipStation to print shipping labels and generate the right amount of postage.

Driven by Amazon and other major e-commerce sites, shipping has become a costly loss leader for many smaller sites. Jimmy Beans Wool, an $8 million-a-year seller of knitting yarn based in Reno, Nev., for instance, charges a flat rate of $4 on all orders and offers free shipping on purchases of more than $75, which ends up costing the company about $370,000 a year. “We consider it just part of our marketing costs,” said Laura Zander, who founded the business with her husband, Doug. But those costs could be twice that amount, she said, if not for a secret weapon she deploys: the United States Postal Service.

The Postal Service may have a reputation as an antiquated drag on the federal budget, but it is surprisingly competitive in order fulfillment, especially with standard-size packages that weigh less than a pound. (The post office’s competitive advantage falls off sharply on packages weighing over three pounds.)

Using first-class mail, Jimmy Beans can ship a package of yarn anywhere in the continental United States for $2 to $4 and expect it to arrive within two days (compared with $5 to $7 with FedEx or U.P.S. ground). Because the Postal Service also provides shipping materials free for priority and express delivery, the company saves $1 more per box and 30 cents on every envelope. For high-volume customers like Jimmy Beans, the post office will even print the packaging with the customer’s own logo, again for free. “I mean, how cool is that?” Ms. Zander said. “I love America!”

What is more, because post office distribution centers are open six days a week until 10 p.m., Jimmy Beans can accept orders on Saturday — the most popular ordering day of the week for its knitters — package them and drop them off at the distribution center by Saturday evening, confident they will be in East Coast homes by Monday. “A lot of our customers tell us they can’t get over that we’re able to do that,” Ms. Zander said. “To them, it’s almost like magic.”

Some businesses have lowered shipping costs by borrowing a page from Amazon and opening multiple fulfillment centers. The reason has to do with the zoned shipping policies employed by carriers that divide the country into seven zones and charge higher rates for packages that cross zones. Even a company like Adagio Teas, with just shy of $10 million in annual sales, has found that it pays to operate two fulfillment warehouses, one at its headquarters in Garfield, N.J., and another in Fresno, Calif. Michael Cramer, chief executive of Adagio, explains that before his company opened the second facility, shipping a $60 order of iced tea to the West Coast cost $30. Now it is just $10.

Nuts.com, a $20-million-a-year e-tailer of nuts and other snacks, has gone even further — with advanced software systems, scores of white-suited warehouse employees, and a whirring labyrinth of conveyors snaking among shelving towers 20 feet high in a 55,000-square-foot-warehouse. And now Jeffrey Braverman, the chief executive, is considering leaping to the next level.

He is in talks with the German manufacturer of a system that eliminates the need for workers to move between locations to gather products. Instead, the shelves bring the products to them. “It’s like a giant vending machine with a brain,” he said. “Whenever an order comes in, these enormous lifts automatically go up and down and back and forth and grab the right shelf and bring it to the packing area.”

After it is installed, the system, Mr. Braverman said, could save the company more than $500,000 a year. “If the bid comes in at less than $2 million,” he said, “I think I’m going to do it.”

From NYT

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