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
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2 comments:
I have experienced the pain of virtual fulfillment when buying products online. The item I purchased was shipped this way, and the problem arose when I tried to return it. The company I bought it from had no ability to take returns as it did not have the stock. The retailer had to coordinate the return to the third party, increasing the time it took to authorize the return.
I have a couple of issues with the article. I do not see how there is a benefit that comes from lower costs due to economy of scale. It seems that product would be ordered one at a time, what is the scale in that. Also, how are lower transportation costs achieved. If a customer goes to a retailer, then the difference in transportation costs would be the difference in the cost of sending product to a retailer versus sending an individual item to a customer. It seems that transportation effeciency, cubing out a trailer, would be vastly better for traditional inventory. While the virtual inventory would have to ship LTL to the residence, which is expensive.
I think Amazon has a pretty good plan, however, I believe it includes several huge warehouses. For example if you order a book from Amazon, it is possible that Amazon has the book at one of its warehouses, which are filled with books that they got at a really good price, or the book may be ordered by Amazon from the publisher at a much lower margin. So Amazon may not make a lot off of this sale, but if the customer has a good experience the next sale could be at substantially higher profit. I believe then Amazon has a hybrid system, which allows for increased profits when available, but still drastic reductions in inventory holding costs.
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