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Outsourcing Product Distribution The Right Way - 2/13/2007 2:25:10 PM

By Gregory Wick of Millennia Vision

For Internet companies that cannot afford to buy and store their inventory or hire an internal logistics staff, outsourcing the product distribution function can be either a smart business decision or a disaster. Success or failure in distribution depends on how carefully and continuously you manage this function to make sure your distribution partners are doing the job that is expected.

B2C Drives DSF Growth
When distribution is not a core competency for your company and you do not have the resources to make it one, outsourcing the function can help your company grow by allowing you to focus on your mission-critical activities. There are two types of outsourcing that are common among start-ups - traditional distribution and drop ship fulfillment (DSF).
Traditional distribution outsourcing involves hiring a third party to store and distribute your products through its national or international distribution network; this party provides the staff, warehouses, distribution center and transportation fleet.

The second type of outsourcing, DSF, has grown in parallel with B2C retailing over the Internet. With DSF, a start-up company sells a product, charges the customer, generates a purchase order, and sends the PO to the manufacturer or supplier, who then fulfills the order by shipping the product directly to the customer. Since the start-up never possessed the product, the company does not incur any of the costs associated with storing or purchase the product. Many Internet start-ups have adopted this streamlined business model.

Unfortunately, companies need to be careful when choosing an outsourcing partner. Outsourcing is not a panacea - if your third-party distributor's procedures and performance are not carefully monitored, you risk permanently alienating the customers you have worked so hard to attract.

The key to a successful outsourcing relationship includes understanding the process, specifying objectives, establishing internal procedures for evaluating performance against objectives, and deploying systems that help to manage the function effectively.

Watching Costs and Service
If the manufacturer or distributor, which may be the same company, fulfills the customer's order correctly, everyone is happy. However, in most cases, there are problems in one or more of these key areas:

Customer service - Another company may be distributing your products, but ultimately you are responsible for the customer relationship. True, your company does not have direct control over the distribution process, but the customer only cares about receiving the product - not who sent it or how it got there. If something goes wrong, you are responsible and must do what is necessary to correct the situation.

Shipping costs - Most manufacturers are setup to ship truckloads or pallets of products, not multiple orders of a single product. There are also manufacturers that require you to purchase more products you need, others set ridiculously high prices for the service, and some simply will not ship the orders. In some cases, start-ups are "kitting" a number of products, not because it adds value for the customer, but because it pushes the dollar value of their order above a threshold where the manufacturer will agree to DSF the products.

Profitability - Shipping costs directly affect your bottom line. Many start-ups are passing along the manufacturer's shipping costs to their customers, raising the price of their products and putting themselves at a disadvantage in a competitive market. If the start-up does not pass along the entire cost, the shipping expense cuts into the profitability of every transaction.

Getting Automated Help
Successfully managing a third-party distributor requires establishing internal monitoring processes and requiring that specific employees are responsible for this function. These employees should also be responsible for developing and deploying computer systems to help automate the management function. Here are five critical requirements for your outsourcing relationship with your distributor:

Establish measurable standards for distributor performance.

Conduct periodic performance reviews.

Visit distributor sites to check security procedures (only if the start-up owns the inventory).

Monitor customer feedback and satisfaction levels.

As sales volume grows, periodically revisit the decision to outsource the distribution function.

The right computer system can improve your ability to manage the distribution function in three areas:

Communication - To allow you to automate communication with your suppliers and manufacturers, you must establish a back-end system. This means that you should not rely just on basic email, generated by an employee, to track orders. For example, you send the supplier an email to check on a backlogged product, someone then emails you back with a response, and finally you re-key the information into your system - imagine a handful of employees checking 500 products. To be more efficient, you need a system that will scale this function as your volume expands and will use automated email, fax, Web portals and/or EDI to communicate order information.

Visibility - You must know if a product is available before it is sold, and you cannot know this until you view your supplier's inventory to find out how much product you have been allocated and what is available. To do this, you need an application that provides you with visibility into your supplier's inventory tracking system.

Track and Trace - Customers want to know the status of their order: When was it shipped, where is it now, and when will I get it? If you want to retain customers, you need to be sure your computer system helps you manage returns, exchanges and refunds efficiently. A consulting organization that specializes in distribution and transportation can help you setup effective internal processes and, if necessary, build and deploy the computer systems you need to manage an outsourced distribution function for maximum benefit. Part of a consultant's value can be in the area of knowledge transfer, educating your organization on how the distribution and transportation function works at the macro level and helping you set realistic expectations.

In the final analysis, outsourcing the distribution function can make perfect sense for your small company - but only if you remember not to outsource the responsibility of keeping your customers happy.

Gregory Wick is Director of Logistics & Fulfillment Operations for Millennia Vision, a full-service provider (FSP) of e-business solutions and services based in Redwood City, Calif.

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