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 December 3, 1999

Inventory flow challenge to e-businesses

Once upon a time, the retailer’s mantra was “location, location, location,” a tenet that comes with inherent pros and cons. A physical location brings storage space for inventory and a defined point in space where most, if not all, customer transaction takes place. The flip side, of course, is that prime real estate requires an investment of prime dollars. An unattractive location is an obvious risk, but, due to oft-exorbitant leases, so is an attractive one.

Like the catalog and the television before it, the Internet allows retailers to sidestep the location issue and its inherent flaws. Replacing physicality with virtuality, however, also cancels out the benefits of a brick-and-mortar store. New hurdles have emerged for the aspiring e-retailer, based on its lack of a transaction-encompassing geographic place. Getting product into customers’ hands without drowning in red ink is the name of this game — “efficiency, efficiency, efficiency.”

There is no clear-cut model for efficiency in this fledgling industry, however. Andy Marker, director of customer service and product support for Boulder-based PlanetOutdoors.com Inc., an online retailer of outdoor goods, delineated several common order-fulfilling alternatives. Marker noted that many Internet retailers, including PlanetOutdoors.com, rely on direct shipping from the manufacturer and partnerships with existing retailers and/or distribution centers. A more costly option, he said, is renting a warehouse and handling the entire process independently.

While there are numerous options for fulfilling on-line orders, Marker noted that PlanetOutdoors.com’s choices have been defined by the specifics of the products they sell and the manufacturers that produce them. Direct fulfillment from the manufacturer is convenient, he said, albeit difficult. “Logistically, that’s difficult to do, especially in the outdoors industry,” Marker explained. “It’s a pretty archaic industry,” in terms of information technology. Vendors are also beginning to revolt from this practice. “They want us to share in the risk,” explained Marker.

Additionally, PlanetOutdoors.com partners with a traditional retailer, Louisville, Ky.-based Quest Sports, which provides “instant inventory,´ said Marker. The problem, however, is keeping up-to-the-minute tabs on what is out of stock at Quest. This has occasionally led to PlanetOutdoors.com having to hit the Boulder retail market in the name of customer service, taking a loss to fill an order that was unknowingly out of stock.

The company also works with a third-party distributor, Wilmington, Mass.-based SalesLink. Aside from cost, Marker named no drawbacks to the practice. “They’re professionals at it,” he said. “That’s what they do.”

Specialists in Internet order fulfillment are emerging in Boulder County as well. Louisville’s ITS Inc., an established fulfillment center specializing in construction goods, is now developing a niche in fulfilling orders for e-retailers. Owner Richard Gerhart noted that cost constraints often limit a start-up’s options.

“I’m looking to match up with people who are a little smaller who don’t have $10 million for the (fulfillment) software,” he said.

Gerhart will warehouse the goods of Internet retailers — who might otherwise base their operations out of a garage — at the ITS facility; orders can be faxed or e-mailed to ITS, which handles fulfillment from there. Direct shipping from the manufacturer, he noted, often negates volume pricing.

In working with ITS, Internet retailers can order a palette of goods and receive volume discounts without worrying about the necessary warehouse space. “A garage is 400 square feet and I’ve got 6,000 to work with,” he explained. “Certainly I charge to make an individual shipment,” he added, “but I probably charge less (than the manufacturer).”

RhythmArt Inc. is a Boulder-based start-up that handles fulfillment itself. As a retailer of imported African drums, it maintains a Web site, www.motherlandmusic.com, as well as a physical location in Boulder. Currently, product is stored at and shipped from a branch in Los Angeles and a small storage space in Boulder. “We’re going to see how the mini-storage thing works out for a while,´ said Ky Fox, a RhythmArt partner. The high profit margin of imported instruments makes such a model feasible, he added, but noted, “Right now, (fulfillment is) just starting to get to be a bit of a burden.”

Such burdens, as well as lower margins, generally have required local e-retailers to outsource a majority of order fulfillment. Steve Troy, president of Boulder’s Jade Mountain Inc., a retailer of sustainable technology, noted that cost-effectiveness and quality of life don’t always go hand in hand, especially in Boulder’s real estate market; thus, he outsourced shipping a year ago. “It just got to be too big,” he said, and outsourcing was a more attractive option than relocating.

Effective order fulfillment equates to good customer service, and contracting a specialist is often the most viable option for a growing Internet retailer. PlanetOutdoor.com’s Marker doesn’t recommend tackling the task independently “unless you’re extremely well-funded and that’s part of your business plan.” His mantra: “Cover your butt to fulfill orders.”

Once upon a time, the retailer’s mantra was “location, location, location,” a tenet that comes with inherent pros and cons. A physical location brings storage space for inventory and a defined point in space where most, if not all, customer transaction takes place. The flip side, of course, is that prime real estate requires an investment of prime dollars. An unattractive location is an obvious risk, but, due to oft-exorbitant leases, so is an attractive one.

Like the catalog and the television before it, the Internet allows retailers to sidestep the location issue and its inherent flaws. Replacing physicality with virtuality,…

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