Not by a long shot. But we have learned a lot about what works and what doesn’t work in the world of e-distribution.

By David Maloney, Senior Editor

What a difference a year makes. Twelve months ago, we were praising the virtues of e-commerce as the greatest thing to impact the supply chain since the invention of the assembly line. We all figured this direct-to-consumer fulfillment model would quickly revolutionize how we shop. Nothing would ever be the same again.

Then reality hit. The sock puppet is gone, the billion dollar IPOs have vanished, and things are pretty much the same as they were before the e-euphoria – or are they? What exactly has the past twelve months taught us?

In a rush to capture market share, many dot coms began taking orders long before they had a proven business plan and distribution capability. And why not? They had all the money they needed, generated by inflated IPOs. It did not matter that many lost money on every transaction. They believed they would make that up and more once they were established as the "big dog" on the Internet block.

Most concentrated on building brand image, believing that if they could capture market share, they would dominate. The 2000 Super Bowl was a prime example of this, as dot coms spent millions to establish an impression that they hoped would turn into paying customers.

"It is hard to build a brand from scratch," observes Jeanne Meyer, vice president of corporate communications for Toysrus.com. "You just cannot throw millions at building a brand and an infrastructure and expect it to succeed. It needs solid business management principles."

Toysrus.com is a prime example of how much can change in a year. Toys R Us, the nation's largest toy retailer was a bit late getting into the Web business. In 1998, they trailed eToys in online orders, and sought to capture more market share. They acquired a state-of-the-art distribution center in Memphis for their Web fulfillment and began ramping up for the holiday onslaught of orders (see cover story in the February, 2000 MMH).

And the orders poured in – actually too many came in. Toysrus.com was so overwhelmed by the volume that it was unable to fill some promised orders on time.

The media attention to the problems experienced by Toysrus.com and a few other large online companies yielded two results. First, many of the new shoppers that dot coms hoped to attract stayed away. Secondly, it prompted the more visible companies to build very large, highly automated distribution centers that would assure they would never be caught unprepared again. These centers were designed to handle any and every order, which means they were overbuilt.

"They were built to support the stock price rather than the business they had," says Jim Apple of The Progress Group. "The facilities were built in a hurry, staffed in a hurry, and opened in a hurry. They could have used a more deliberate process. There was no historical data for the design."

Another problem was that these start-ups had a tremendous amount of money available to them from their IPOs and other investors. They could afford highly automated facilities, whether practical for the work they were doing or not. High-level sortation systems, for instance, were placed in many of the DCs. Some of these sorted very unproductively to individual orders. Too many batches were also developed for optimized fulfillment.

They were getting low utilization out of the hardware," says Apple.

Fulfillment also took a back seat in many of the business plans.

"They took the distribution for granted and focused on the marketing," says Ann Drake, CEO of DSC Logistics, a third party logistics provider.

Drake says that many of the problems were due to a lack of fulfillment knowledge by many e-entrepreneurs.

"Folks who are not close to it think it is easier than it is," she adds. "We learned through our experience that you cannot have the answers without a process of discovery. You need to have that planning time. The ones that are successful do that,"

Time was also a huge problem. So many dot coms felt they had such a short window of opportunity that they threw everything into their one shot, assuming that the high stock prices they had garnered initially was proof of their worth. But then reality hit.

Just as the investment pendulum swung widely one way with huge amounts of money thrown at anything Internet-branded, so it swung back with equal ferocity.

"In the middle of the expansion came the impact of financial risk," says Jeff Wilke, senior vice president of operations for Amazon.com.

Investors, ever eager to follow the herd, suddenly demanded profits. This plunged many e-stocks to single-digit values.

"Investors suddenly wanted to address tactical issues and to see payback sooner," says John Fontanella of AMR Research.

Brand identity was no longer enough. Instead, e-companies had to focus on customer service and a solid distribution infrastructure.

drugstore.com is among today's dot com survivors mainly because it paid attention to its customers and carved a product niche that fosters repeat business. It also built a highly reliable distribution center with automation that is scaleable as the business grows (See cover story in May, 2000 MMH).

"We are in a challenging marketplace," says Chris Hauser, vice president of distribution for this online drugstore. "It has really made us re-double our efforts now for the customer."

Hauser says his company concentrates on communicating well with its customers on the front end, the Web site, and then uses its distribution center efficiently to meet the obligations of the back end. While the DC may be processing thousands of orders each day, each is treated with individual care and attention.

"When you get that package at your doorstep, you don't care about the 10,000 other orders. You only care about your package," he says. "We were founded on a principle that if you meet or exceed customer expectations, they will continue to come back."

Some 60% of all business is from customers who have purchased within the previous three months. Selling health and beauty products is also a business niche that is always in demand.

"Regardless of the economy, people will use the same amount of toothpaste this year as they did last year," says Hauser.

drugstore.com is expected to show a profit by 2004 and has adequate capital on hand to achieve that goal.

Another advantage it has is partnerships. Both Rite Aid and Amazon.com are investors, and each uses drugstore.com as its online retailer for health and beauty products.

"The partnerships are a key to being able to market customers in a very efficient way," says Kelly McGinnis, drugstore.com's director of corporate communications.

While no one knows what shape e-commerce will take in the future, we know it is here to stay. Most doubt though that there will be many more Amazon.coms in the pipeline.

"There will be lots of people in the space, though it will be hard for many companies to replicate what we have done," says Wilke. "We have had time and experience on our side."

E-commerce has, though, greatly affected the way traditional retailers conduct their own fulfillment. More orders are shipping in smaller quantities, and those same orders are being processed more efficiently than ever.

"There is definitely an impression on the part of the consumer that if orders come in instantly, such as electronically, then they expect a more immediate response," says Apple. "As more traditional companies step into electronic order entry, they will have to step up to faster response times."

A major benefit of the Internet is its ability to foster communication and collaboration. The technology is ideal for providing visibility to the entire supply chain, providing information on order status, inventory, and integration.

"We are really moving toward process streamlining," says Fontanella. "That is where the real value proposition is."

Third party providers will also have a greater role to play. They excel at helping new Internet players traverse the difficult waters of fulfillment.

Drake says e-commerce has been good for 3PLs, as it has helped them learn to cut their cycle times, become efficient, and highly flexible.

"The gold rush didn't pan out, but the Internet is here to stay and will grow. There is a huge role for 3PLs that have the experience to adjust to their customer's needs," she says.

While they receive little publicity, small dot coms also seem to have an advantage.

"Looking at technology, we find that the dot com channel works best with small operations," says Apple. "It's easy for these micro Internet retailers to spring up. These little guys are having success with little automation. They make their investments on the business that is there, not what is to come."

One thing we need to realize too is that e-commerce is still in diapers. While it has been a tumultuous ride the past year, it is only the beginning.

"It will not be just a passing fad," says Drake. "After all, it took 100 years to get to the industrial age."

Click on this icon to read about five e-fulfillment companies that have become Internet survivors.