There is a fundamental challenge in making many decisions.
“How do I know what I don’t know?”
The decision regarding rather to build or outsource increasing your brand’s D2C fulfillment capabilities is no different.
One solution: ask the expert. The guys who’ve been there, done that and have a pretty good idea of the dragons lurking just over the horizon.
And if you are talking ecommerce fulfillment, that expert is Stephen Bullard.
Stephen knows fulfillment. He’s worked the brand side (Pepsico and Darden Restaurants). The logistics side (Pilot Freight Services). And the 3PL side (Tompkins Fulfillment Services and, currently, as executive VP of operations for Verte).
Stephen recently sat down with Michael Anderson, Etail CEO and host of our live briefing webinar series “D2C Leadership Now”. The subject: How brands can expand their D2C fulfillment capabilities while limiting risk and staying in control of their fulfillment network. We’ve edited their session for length, and that meant trimming a lot of useful tips and in-depth sideline discussions. But you can view the recording of the entire live briefing here.
IT’S ALL ABOUT SCALE
Ecommerce fulfillment seems pretty straightforward…at least on the surface.
“You need to ask yourself is at the end of the day what are the six or seven things that you really want to accomplish when you're talking about fulfillment,” Stephen says. “So you want to make sure the right product gets shipped, at the right time, so it arrives in the right condition, at the right cost with the right service level, and that it arrives with the right experience.”
But at the core of the outsourcing decision lies the need to understand what your consumers expect, the ROI of meeting their expectations, and how to scale the process, Stephen says.
This can change over the lifetime of the brand as volume grows and sales channels expand. Digitally native brands face one set of challenges, which can often be addressed by highly specialized 3PLs. But recent trends show even digitally native brands may need to expand with marketplace distribution or a wholesale or retail footprint to survive. So they may outgrow the partners that served them well in their start-up years.
Other brands evolving from marketplace fulfillment face another set of challenges. And consumer packaged goods and other legacy brands that grew though retail may need to maintain some of their traditional distribution while expanding their D2C reach. So they have yet a different set of needs, infrastructure requirements and potential partners.
“Whatever the case may be, you need to come to a realization that when you do outsource what you're doing is making a fixed cost into a variable cost,” Stephen says. “And in order for that variable cost to make sense for you, it's going to have to be scalable. That’s the value prop that a 3PL brings to you – call it “fractional ownership” of fulfillment capabilities. But to work, that arrangement needs to be scalable, efficient and beneficial for both you and the 3PL.”
How do you decide on either taking a DIY or outsourced approach to expanding D2C fulfillment? Stephen suggests starting with an internal assessment.
“The process starts internally,” he says. “So it’s important that you be honest about what your fulfillment costs currently look like and what your goals are in outsourcing to a 3PL. Is it to get a better cost? Improve service levels? Be more scalable? Then take a hard look at what your internal capabilities truly are and what your experience managing outsourcing as an organization really is. But the most important thing driving success with an outsourced partner is culture fit.”
Many organizations think that because they outsource some functions – many of which are transactional – they also understand how to manage outsourcing other functions…which involve a longer-term, partnership approach to success.
“A lot of organizations think they know how to manage outsourcing fulfillment because they already outsource transportation," Stephen notes. “But think of it like a marriage. Selecting transportation carriers is like dating. Walking away hurts a little bit, but switching carriers is not a big financial impact. The impact of switching 3PLs is a big deal. It’s like being married, getting divorced and paying alimony. You need to view this as a long-term commitment. Because once you make that commitment, it’s very difficult financially to change and if you are unhappy, you are going to very unhappy.”
You get three options when selecting fulfillment partners: fast, good & cheap. The catch is that you only get to pick two.
But it's important to be realistic about what to expect from partners, Stephen cautions.
“I always tell everybody you get three options with fulfillment partners – they are ‘fast’, ‘good’, and ‘cheap’,” Stephen says. “But the catch is that you only get to pick two. If you want an outsource partner that’s fast and good, it’s not going to be cheap. If you want cheap and fast, it’s not going to be good. So you need to make the decision on how you are going to balance those three variables because the end of day you're only going to get two.”
CHECKING OUT THE CHOKE POINTS
In his experience, Stephen said there are several “choke points” which can make or break an outsourced relationship. Discussing these points internally and then with potential partners will help build the foundation for a successful relationship.
Picking the Right SKUs
What products make sense to outsource to a 3PL for D2C and B2B fulfillment? It doesn’t have to be an all-or-nothing approach.
“Not all product lines are created equal and they don’t all need to be supported equally,” Stephen says. “To get started, maybe it makes sense just to outsource the D2C part of the business because that's exploding but keep your relationships for other products with the wholesale customers that you started with or vice versa.”
Understanding Inventory Footprint
How many distinct SKUs do you need to support with D2C fulfillment capabilities? You might have the same inventory footprint with 300 SKUs that someone else has with 10,000 SKUs, but the 3PL’s strategy and costs for how to manage and fulfill using your footprint would be dramatically different.
Getting Inventory Into the Warehouse
What is the expected inbound throughput and how will the product arrive to the warehouse? LTL? Truckloads? By the shipping container? Understand the supply chain challenges in getting product to your fulfillment partner – including understanding surrounding ports and congestion issues if you’re off-shoring production.
What does the outbound throughput look like? Is it tied to standard D2C fulfillment practices like a two o’clock order cut off to qualify for same-day shipping? The practice of daily shipping order deadlines and cut offs is a major mental shift for legacy brands accustomed to shipping pallets in trucks but which now need to meet carrier shipping deadlines to fulfill individual D2C orders.
Estimating Units Per Order
What are the expected units per order? Most D2C orders contain only one or two pieces. But you may also plan to use your 3PL for store replenishment for retail accounts. That impacts material handling, packing, carrier selection and even the potential for automation.
Dealing with Seasonality
Is there seasonality to some or all SKUs that needs to be accounted for? Here’s a pro tip: When you are evaluating 3PL or fulfillment service, ask about the seasonality of their other customers. In an ideal world, these customers would have a different peak season that would complement yours. For example, you might be selling beach umbrellas while another of the 3PL’s customers is focused on back-to-school. Demand for your umbrellas is probably picking up in early summer and dropping in late summer as back-to-school approaches. The reverse is true for the other company. That gives the 3PL more flexibility in meeting both of your requirements.
Appreciating Staffing Issues
Can the 3PL scale its staff to support you? The factor most brands miss asking about is labor availability and cost. Employee morale is also important. Stephen suggests that when you a visiting 3PLs you plan to or already work with, go out to talk to employees on the dock and in the warehouse.
“If a 3PL won’t let you talk to people on the dock, then are hiding something,” Stephen says. “And that is never good.”
Managing Multiple Locations
Does the 3PL have the ability to scale to multiple locations – either their own or managing a network as a 4PL?
“I know Amazon has trained their customer that they should be able to order something and get it the next day or in two days,” Stephen says. “But the reality is that there are plenty of brands out there where their customer base does not expect overnight delivery. So two-day delivery could be handled through a distributed network for those customers that really want it. You really need to understand customer expectations and the ROI involved.”
Planning for Omnichannel Distribution
What are your plans for omnichannel distribution and selling through multiple types of sales channels – D2C from your website, marketplaces, retail accounts, dealers or distributors? And remember, what you plan to do now may change down the road.
With even digitally native brands adopting a multi-sales channel approach and legacy brands looking to increase D2C capabilities, understanding and executing a mixed, omnichannel approach often becomes one of the biggest hurdles to success.
“Omnichannel is a big buzzword out there, “Stephen says. “But what omnichannel really means to a lot of clients is that they that are shipping B2C and D2C from a single location is instead of segregating their inventory. They are pulling that inventory into a single location that truly can support the different demand channels from one location and allows them to consolidate their inventory.”
Inventory allocation and publishing becomes key to omnichannel success, Stephen added – especially for brands new to the D2C way of thinking.
How you publish is the determining factor not overselling. You have to think about overselling a little differently in the D2C world.
“How you publish is the determining factor not overselling,” he says. “There is a bit of an art form and a technology challenge to this. You have to think about overselling a little differently in the D2C world. When you are selling B2C wholesale, you can deal with things like backorders. But the cycle times in the D2C world are so tight, you can’t depend on customers allowing a backorder.”
Stakes are even higher than just disappointing customers, Stephen added. Retailers and marketplaces have service level agreements that include shipping expectations. Missing shipping targets can get your brand suspended from those channels. Missing shipping windows also can have a huge effect on brand equity
AVOIDING ROOKIE MISTAKES
Stephen says it often makes sense to hire a consultant or expert to manage the selection process – even if they don’t manage the longer term, day-to-day relationship.
But there are a few missteps that he commonly sees when brands attempt to build their D2C capabilities either internally or through partners.
The Touch and Feel Syndrome
One of the most common mistakes companies make in selecting an outsourced fulfillment partner is what Stephen calls “the touch and feel syndrome” – the desire to select a partner that is geographically near their existing facilities. Stephen said it provides a false sense of security if management can just “run over” to see what is going on. D2C success depends on agreeing to KPI expectations, workflows, automation and systems – not corporate micromanaging.
Underestimating the D2C Challenge
Many legacy brands underestimate the challenges involved in building out D2C capabilities. It’s more than just transforming warehouse space from a B2C or B2B model to D2C. It’s a total change in mindset driven by the need to ship high volumes of individual parcels under deadline.
“The bottom line is that a facility that is optimized for pallet or carton wholesale fulfillment is going to struggle with the kind of volume that moves through D2C,” Stephen says. “The units of measure; the equipment required to stock, stage and pick and package orders; the staffing requirements and skill sets are all different.
“You’ll be facing specific day-to-day cutoffs that need to be managed and the need to allocate inventory to different channels. It can be overwhelming.
“I’ll give you an example: we had one of the largest brand retailers in the country come to us. They had more than enough capacity and 4-5-million-square-feet distribution centers. They were handling store replenishment and some online sales just fine. Then Covid closed their stores and they were forced to do 100 percent consumer sales and fulfillment online. Every one of those distribution centers choked. So there's an example of even deep-pocketed large operations that as soon as their mode changed dramatically from a wholesale to a D2C environment they just didn't have the bandwidth or the capacity to support it.”
Ignoring IT Infrastructure Gaps
It’s important to realize that when outsourcing D2C fulfillment, you may also be outsourcing major components of your IT infrastructure and maybe even your operations technology stack. Stephen suggests that it is critical you and potential 3PL partners understand each other’s IT capacities and expectations.
“If they don't have a lot of the right infrastructure and you don't have a lot of the right infrastructure, I can promise you there's going to be lots of hugs and kisses at the beginning of the process and that there's going to be a lot of frustration very quickly,” Stephen cautions.
Depending on the 3PL’s Platforms
Along with understand IT infrastructure, Stephen says it’s critical to understand the systems the 3PLs will be using to manage your business.
Investing in a third-party ecommerce operations platform is the best way to stay in control of your fulfillment partners. In fact, it may be the only way to stay in control.
For many brands, it may be a good idea to invest in their own ecommerce operations management platform and then use that platform to help manage the 3PLs. In fact, it may be the best way to outsource yet stay in control of your fulfillment operations.
After years of experience on both the client and the 3PL side of the business, Stephen notes that 3PLs are often not quick to communicate when problems occur.
“I’m an old guy, so I use old sayings,” Stephen says, laughing. “Here’s one: people respect what you inspect. In general, 3PLs are not quick to communicate with you when they have problems. So you need to have access to data through a third-party software platform and not be dependent on the 3PL’s software package.
"When you are connected to your own software platform, then your catalog becomes the single point of truth in managing orders. You will see inventory, order volumes and back orders, and performance against service level agreements and not be dependent on communications from the 3PL.”
Using third-party software has another advantage, Stephen notes.
“Quite honestly, one of the worst experiences everybody has with 3PL's is invoicing,” Stephen says. “Everybody hates invoicing. All invoices look different and they are hard to reconcile. So if you have third-party software, generally it makes the invoice audit process much cleaner."
Overestimating the Importance of Price. Underestimating the Importance of Culture
Despite the importance of ROI return and understanding costs, Stephen says that choosing an outsourced fulfillment partner shouldn’t be just a price-driven decision.
“When you think about supply chain, you have your landed product cost and you have your cost of getting the product to the distribution center. Then you have the cost of fulfillment – which is basically inbound storage and outbound processing – and then the last mile cost of getting the product to consumers.
“It’s important to remember that for every dollar you spend, 80 cents will be for transportation and only 20 cents will be for fulfillment.
“So I would say that making sure that your 3PL partner has the right culture, the right systems, the right infrastructure, the right commitments to KPIs and the right references are more important than the price because it's like the old adage that if you try to commoditize fulfillment, it's going to be one of those situations where you trip over a dime to save a penny."
Stephen stresses the importance of fit as the foundation of successfully expanding your D2C capabilities through outsourcing.
“You want a mix of somebody that culturally matches up and their business model supports your business model," Stephen says. "And you need to have these conversions upfront.
“I would say that over my 30 years of doing this, 90 percent of outsourcing partnerships have failed when people made this a strictly a commodity deal where they put a RFI package together independently of understanding these other factors.”
LEARN MORE. WATCH THE WEBINAR
We've just scratched the surface of Michael Anderson’s discussion with Stephen Bullard.
Other topics included:
- Which KPIs really matter for D2C fulfillment and managing fulfillment partners?
- The fit and pitfalls of using robotics in D2C fulfillment.
- The challenges of publishing inventory across multiple channels and distribution partners.
And much more.
Check out the recorded version of the live briefing here.