User-Unfriendly Order Fulfillment

Date:   Saturday , January 01, 2000

First-generation e-commerce is a money pit. Early efforts have focused on building nice Web sites and attracting traffic. Little coordination has taken place between online order taking and physical fulfillment. Customers browse static online catalogs and place orders that are matched against available inventory. In some cases, online orders are actually reentered manually into the company’s production system to initiate the fulfillment process. This lack of integration between front-end and back-end processes contributes to problems such as wrong configurations, delayed shipments, generally poor service and most importantly, unprofitable business.

Superior order fulfillment capability will very quickly become a key competitive advantage. More consumers visiting more online businesses will means little tolerance for shoddy service. Irrespective of how attractive or user-friendly a Web site is, customers are unlikely to come back if the order is not filled quickly and accurately.

Climbing out of the Money Pit

e-commerce will drive lots of new sales but also contribute to exponentially increasing demand variability and order complexity. On the Internet, the next three orders to any given site could be from three different continents with each order requiring a different configuration. Customers will look for real-time information on capacity, production schedules, delivery dates, and transportation options before they order. Back-end systems will need to modernize to meet these requirements. In our view, the traditional make-to-stock mode, favoring inventory as a buffer against fluctuations in demand, will soon be history.

Another significant upcoming change is the move toward dynamic pricing. With the exception of airlines, who have experience with yield management and floating price points, most industries that produce products or services with a short shelf life predominantly use fixed pricing schemes. With the Internet as the common platform, pricing can now be adjusted to reflect real time supply and demand. Instead of lowering or raising prices in increments for the whole target base, pricing can become customer specific. Markets typically support various prices for a single asset since it is a function of the unique value it represents to every buyer and seller at a particular point in time. Just like the airlines, companies dealing with perishable assets (electricity, short life cycle products, and other goods with fluctuating prices) can set prices in real time that helps maximize profitability.

Adjusting to Internet-driven order variability, order complexity and pricing are three key pressure points that traditional businesses have to resolve to be successful. These are also important steps for migrating towards a customer-driven build-to-order model. Sophisticated supply chain planning and collaboration software will play a key role in facilitating that transition.

Planning and Optimization

The Internet is a natural supply chain facilitator. It has finally provided a medium to connect participants in real time, at low cost. The connectivity issue has been a major hurdle, one that until now has limited true collaboration. The Internet should help dramatically improve the flow of information between supply chain partners and consequently accelerate the physical flow of goods. e-commerce is all about speed, connectivity, and effective anticipation of customer needs. Companies need to implement business applications that increase responsiveness in the face of rapidly changing business conditions. This is why supply chain software is a hot area of investment.

The following business transaction example highlights how software is being used to tackle online orders and optimize pricing. An electronics customer (X) seeks 100,000 computer chips (A) immediately, and the manufacturer can commit only 70,000. With a first-generation static Web site with no real back-end links, there are two primary outcomes, both of which are unfavorable. The customer bolts to a competitor, who, of course, is just a click away. Or, if the customer is important enough to the overall success of the business, the manufacturer will decide to fulfill the order unprofitably (using outsource options, emergency production runs, express shipments, or other emergency measures).

An integrated customer interaction – supply chain planning system from vendors can help companies react more efficiently. The customer may instantly be offered the 70,000 units of A and 30,000 of an equivalent B and a price discount that makes the package worthwhile. But unlike the first case the manufacturer still makes a profit. In this case the front-end offer is being made based on real time visibility into production and distribution. The software can intelligently assess the problem by juggling multiple constraints (product, manufacturing, and financial) and calculate a solution that tries to maximize both customer service and profitability. Another way to tackle the same problem would be to offer X the full amount with the additional 30,000 units borrowed from a shipment already allocated to another customer Y. Here customer Y is willing to accept his shipment a few days late for a small price break. The profit from X offsets the price break given to Y.

The real time problem solving capability afforded by Advanced Planning and Scheduling (APS) technology is being applied to a wide range of regular business and e-commerce problems involving demand, production, distribution and transportation. APS uses sophisticated software algorithms that derive the best possible solution while attempting to maximize one or multiple goals such as profitability, customer service, delivery dates, or other variables. The software will simultaneously evaluate constraints such as change in supplier schedules, capacity issues, production problems, and quickly calculate the effect of these changes. In minutes, planners can create new production schedules across multiple plants that take into account last minute changes in a customer order. Such streamlined reporting helps improve manufacturing responsiveness and flexibility resulting in shorter lead times, accurate available-to-promise dates, and lower inventories.

New entrants are combining Internet connectivity and advanced optimization technology to create significant value even in traditionally staid industries. Nonstop Solutions Inc. is focused on the demand chain optimizing product and information flow across manufacturers, wholesalers, distribution centers, and retail stores. It offers a unique full service, hosted solution (currently for drugstores) where it takes responsibility for implementing and running the service with minimum guaranteed results. Every night, nonstop downloads store orders, purchase orders and inventory information to its hosting center and sends back optimized POs, daily and 90-day replenishment plans and buyer reports. Customers do not license the software but pay annual service fees for fixed term contracts.

Multi-Enterprise Collaboration

A lot of action is brewing on the multi-enterprise collaboration front with the Internet being used to share relevant information in real time with business partners. Seamless product, production and logistics information flow across company boundaries has been difficult to achieve, presenting a major obstacle to efficient supply chain management. Problems have included disparate systems, different information formats, costs of building private networks and custom interfaces, as well as security issues. In almost every industry, improving collaboration will unlock millions of dollars in cost savings, will accelerate time to market, and improve profitability. For vendors, the opportunity is very large and virtually untapped.

Agile Software offers an Internet-based product content collaboration solution that helps customers interact closely with supply chain partners. With outsourcing on the upswing, coordination and management of thousands of individual parts that may constitute a single product is critical. Clients like Solectron, HP, and Flextronics use Agile to rapidly communicate information on design changes, product defects, test and machine instructions and customer preferences. The collaboration results in faster time to market, efficient production and increased responsiveness to changing market conditions. Such seamless communication is one of the key steps in migrating to the build-to-order model discussed earlier.

i2 Technologies recently unveiled ambitious plans for a high-tech industry trading exchange. Industry participants will be able to plug into the Web-based shared service to access real time demand and supply information. A stumbling block today is that there are too many points of contact. For example, IBM’s supply chain involves chip manufacturers, component suppliers, distributors, resellers and logistics providers. All these vendors, however, are also part of multiple other supply chains such as those for Compaq, Dell and Gateway. Collaboration is tough as it is physically impossible and expensive to custom build links with every major customer or supplier.

With the Internet-based shared service hub, it costs little to be connected in real time with the industry. So, for the PC industry, the hub may include IBM, Compaq, Dell and HP with component suppliers like Seagate and Quantum, chip manufacturers like Intel and AMD, distributors like Ingram and Tech Data, logistics providers like FedEx and Ryder, plus scores of resellers. Now, if IBM were to turn down a previously ordered shipment of drives, Quantum could instantly post this availability of capacity on the exchange and have it bid upon instantly by other players. The possibilities are numerous, and participants will have the flexibility with real time visibility into demand, manufacturing, inventory, pricing, configuration and transportation information. So although individual supply chains may be competing, they will all benefit by tapping into the collective supply-demand equation at the exchange.

There is simply too much to gain in Web-based collaboration for most industry players to withhold participation over the long term. However, there is always a big gap between vision and a working model. Getting a critical mass of companies (many of who will be competitors) to participate will prove to be a challenge, as will issues like hosting, security, data access privileges and payment mechanisms. There may be many iterations before the final form, which could look different — and in fact be even more efficient — than the models outlined here.

Bala Srinivasa is a Senior Analyst at Pacific Growth Equities, a San Francisco based investment bank and institutional brokerage firm. Bala has covered the software industry as a Wall Street Analyst for six years. Contact