Virtual Fulfillment Path

Why hold goods in anticipation of orders if you can get someone else to do it for you? But upon closer examination, virtual order fulfillment proves to be something less than the silver bullet. The guidelines offered here will help both pure-play and brick-and-mortar companies determine which fulfillment path--virtual or traditional--is right for their online business.

Over the past five years, many companies have experimented with combining information technologies (such as electronic data interchange, enterprise resource planning, and the Internet) and sophisticated distribution techniques (hub-and-spoke configuration and cross docking) to create innovative supply chain structures. Perhaps the most striking development in this space is the dramatic increase in virtual order fulfillment, which is accomplished by the technique called drop shipping. With drop shipping, the retailer passes orders straight through to a wholesaler or manufacturer, which then ships products directly to customers with the retailer's label on the package. The retailer itself holds no inventory.

At first glance, the advantages of the virtual supply chain appear overwhelming. To illustrate, thriving CD retailer Spun.com avoided an $8 million investment in inventory by using the fulfillment capabilities of the wholesale distributor Alliance Entertainment Inc. Competitor CDNow, by contrast, which owns its inventory and fulfillment capabilities, has declared bankruptcy because it is unable to cover its costs of doing business. Yet other real-life examples fail to provide such clear-cut evidence of the virtual supply chain's comparative advantages. Online retailer Value America, for example, declared bankruptcy citing in part an inability to fill customer orders from virtual stocks. Value America's chief competitor, Amazon.com, on the other-hand, has aggressively invested in fulfillment capabilities and continues to garner high ratings for service. Most importantly, the online retail giant recently posted its first quarterly profit.

Benefits of choosing virtual inventories:
1. Reduced investment in inventory and fulfillment capabilities
2. Wider product selection
3. More predictable product availability
4. Lower costs due to economies of scale
5. Lower transportation costs

Costs of Virtual Inventories:

1. Loss of product margin
2. Loss of control that could negatively affect service quality
3. Encroachment on customers

Chooding a supply chain structure:
Higher sales volume favors the traditional structure
High need for order consolidation favors the traditional structure
Lack of small-order fulfillment capabilities among wholesalers favors the traditional structure
High demand volatility favors the virtual structure
High product variety favors the virtual sturcture