E-tailers Prepare for the 2000 Holiday Season

Tuesday Oct 31st 2000 by Karen D. Schwartz
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This past summer, a government watchdog agency cited and fined seven online retailers for poor order fulfillment last Christmas season. Now all e-tailers are pressed to do a better job at customer service. Their weapons: increased attention to inventory, customer service, and warehouse management.

SmarterKids.com CIO Rich Secor

When Rich Secor picked up a business magazine last July and read about how the Federal Trade Commission (FTC) had fined seven e-tailers for failing to adequately address customers' fulfillment expectations, it simply confirmed what he already knew.

Secor, CIO of SmarterKids.com, already had begun to make the company's customer service and fulfillment systems even more responsive and integrated than they had been. His mission started soon after the 1999 holiday season, when he began reading every FTC document he could find related to security policy and the use of customer information. Soon he began scrutinizing the rules and regulations the FTC had set forth for Internet-focused businesses that directly ship to customers.

When he read about the problems that had caused the FTC to cite seven companies--including failing to fulfill orders in a timely fashion and failing to notify customers about shipping delays--his resolve grew. Although SmarterKids.com hadn't experienced any fulfillment or customer service problems last holiday season, Secor knew he never wanted the Needham, Mass.-based company to encounter these issues.

"All of our systems and operations, including customer service and fulfillment, are designed around the goal of pleasing customers," he says. "The amount of customers companies are getting is going up every year, especially around the holiday season, so customer service and fulfillment becomes a particular challenge. Even though our last Christmas season didn't cause any delivery problems or delays or missed shipments, we learned from it. Our goal is to enhance all of our systems and more tightly integrate our operations to anticipate and prevent any problems."

When the FTC Speaks, E-tailers Listen

Secor quickly created the position of FTC compliance director. This employee now is responsible for ensuring all the company's systems, policies, and business units conform to current FTC regulations. Secor also spearheaded a successful campaign to reclaim management of SmarterKids.com's warehouse from external sources, which he says will help foster better communication and integration between warehouse activities and customer service requirements.

To some, Secor's response to other e-tailers' fulfillment pains might seem a bit excessive. However, it's just the kind of proactive thinking that experts believe is needed to make e-tailers ready to greet the new holiday season--a time that analysts believe will experience millions more Internet-based orders than last year. Indeed, online purchases grew to $7 billion in 1999 from $3.1 billion in 1998, says New York-based Jupiter Communications LLC, and are expected to grow even more this year.

The severity of the issues experienced by the seven retailers--CDNow Online Inc., ToysRUs.com, KBKids.com, Macys.com, Patriot Computer Corp., and the Original Honeybaked Ham Co.--varied, with each receiving a fine ranging from $45,000 to $350,000. Although the fines were steep, FTC officials say they hoped the levies would help stem the tide of unresponsive e-tailers that fail to provide acceptable levels of customer service.

At a Glance: SmarterKids.com
Company: SmarterKids.com, headquarters in Needham, Mass., has 120 employees, plus an additional 40 in customer service, fulfillment, and IT during the holiday season.

Online Sales for Q4 1998: $22,000

Online Sales for Q4 1999: $4.3 million

Predicted Sales for 2000 Holiday Season: $5.7 million

Customer Service Systems: Browser-based homegrown system from SmarterKids.com using Microsoft Corp.'s Active Server Pages; Cisco Systems Inc.'s Customer Interaction Suite, allowing for online chat and Web call-back between customer service reps and customers Fulfillment system: Logility Inc.'s WarehousePro Other pertinent systems: Homegrown audit reporting system that uses data from a Microsoft SQL Server database to pinpoint potential problems.

"We're hoping these actions sent a message to e-tailers to wake up and realize that they have obligations to consumers, particularly when they make quick-ship claims," says Heather Hippsley, assistant director of the FTC's enforcement division in Washington, D.C. "All of the companies we brought actions against competed on their shipping claims. If they say their order turnaround is 48 hours or that they ship within 24 hours of an order being completed, it has to be true."

Most of the fined companies are taking the FTC's reprimands seriously. CDNow, for example, is working on initiatives in both customer service and fulfillment. Amy Belew, vice president for customer service and operations at the Fort Washington, Pa.-based music e-tailer, says she plans "not to miss a beat" this year. Belew insists, however, that CDNow's FTC troubles didn't stem from a holiday blow-up but instead from the timing and clarity of its communications with customers.

"Some of the companies cited had severe problems in not being able to fulfill orders and not having effective communications, but that really wasn't our issue," she says. "Our FTC issue centered around the timing and clarity of our communications. We needed to size up a few things on our end in terms of the way we send emails out to customers regarding shipping notices and backordered items."

Focus on Fulfillment

Fulfillment is a particularly thorny issue for traditional retailers now entering the dot.com space. Witness KBKids.com and ToysRUs.com, both traditional toy retailers that have had significant troubles developing their online and fulfillment systems. Both were cited by the FTC for fulfillment issues.

Although KBKids.com still is grappling with its issues and refused to return phone calls, the recent partnership between ToysRUs.com and Amazon.com probably is an attempt, at least in part, to deal with the toy company's fulfillment problems, says Seema Williams, senior analyst for online retail at Forrester Research Inc. of Cambridge, Mass.

"Focus your energy on making your warehouses more efficient, and devise a plan that allows warehouses to back each other up. The key is warehouses--not IT systems."

"I think ToysRUs threw its collective hands up and said, 'We've got enough trouble in our traditional business to worry about, so let's let somebody else take care of it,'" she says. The choice of Amazon was particularly smart for ToysRUs.com, Williams notes. "You rarely hear about delivery problems with Amazon. It has always been good at fulfillment."

Like CDNow, officials at Patriot Computer, in Markham, Ontario, Canada, insist the company's problems were not typical of the other six fined e-tailers. Although Patriot Computer didn't deliver about 50% of the orders it had promised before Christmas, the problem was caused by a power supply problem on the company's Barbie and Hot Wheels PCs--not by faulty internal processes, says chief operating officer Dave Morrison. Without this problem the company would have fulfilled 98% or more of its orders, he says.

"We had a quality problem that hit the last week of November, and it caused us to have to stop shipment," Morrison says. "We had a system in place to notify customers, but we weren't able to notify everyone."

With Christmas fast approaching, customers began to panic and flooded the 230-employee company with calls. "You just don't plan for that amount of phone capacity increase all of a sudden," he says.

In response to these issues, the company has developed a homegrown report for its customer service area that analyzes delays one week before the orders come due and generates a letter required by the FTC that alerts customers about order delays. If the order will be delayed again, the system generates a second letter and the order automatically is cancelled, Morrison explains.

If industry reaction to the FTC fines is any indication, by shoring up its customer service systems Patriot Computer is on the right track.

Many companies also are adding more customer service representatives for the holiday season. In fact, it has been standard practice for several years in both the online and offline retail worlds, says Forrester Research's Williams.

That's one step CDNow plans to continue this year. In fact, CDNow expects to increase its customer service reps by up to 35% for the coming holiday season, says Belew.

CDNow Online Inc.'s Amy Belew, VP, customer service and operations

"We know we'll increase our resources in the customer service area this holiday season as we do every season," she says. "We're going to make sure we use a combination of e-mail and phone support strategies to create a centralized atmosphere, and we plan to bring on some specialists who can work specifically on holiday order questions."

Providing additional training for customer service reps--both permanent and seasonal employees--can improve the process, too. SmarterKids.com's customer service reps undergo an exhaustive training program that teaches them how to properly interact with customers. And CDNow plans to give its reps specialized training on how to handle e-mail and phone inquiries.

But adding customer service representatives and training won't make much of a difference unless e-tailers have a system in place to handle customer inquiries quickly and efficiently.

"Retailers need to make promises and keep them," says Steve Robins, director of products and services marketing at Servicesoft Inc., an e-tailer-focused software developer and service provider based in Natick, Mass. "To do that, they need an integrated system so every piece of the system knows what is going on everywhere else."

Using these types of systems can help eliminate inaccuracies about in-stock items--a misperception that can turn to bitterness when an item is not received as promised.

"Let's say a customer goes to a Web site toy store, which might have a front-end catalog showing the product is available. But the information on the Web site is only getting updated once a day. The company might not have tight integration into the back-end, and because the inventory isn't being updated in real time, they can have stock-out situations very easily. If you're missing that integration, you're going to have major challenges," Robins warns.

There are many such systems on the market. SmarterKids.com, for example, uses San Jose, Calif.-based Cisco Systems Inc.'s Customer Interaction Suite to provide online chat and online help to its customers. In addition, SmarterKids.com uses a homegrown, browser-based system that helps the company anticipate FTC violations and other problems that could lead to customer dissatisfaction, Secor says.

Elves Kept Busy Filling Online Purchases

Source: Jupiter Communications, 2000

For its part, EddieBauer.com chose Servisoft's Servicesoft 2001 to help bolster its customer service capabilities. Before implementing the system, EddieBauer.com was inundated with customer service requests. Instead of responding by phone, the software allowed the company to answer almost 75% of its inquiries by email--most often in less than two hours. In fact, the automated customer service tool helped Eddie Bauer Inc. avoid adding even more people to its call centers during the last holiday season, according to Susan Knight, vice president of customer satisfaction at the Redmond, Wash., retailer.

Rethinking the Warehouse Strategy

The single most important change e-tailers can make to ensure that fulfillment issues don't rear their ugly heads again this holiday season is rethinking and reorienting their warehouse strategies, Forrester Research's Williams says. By adding more warehouses or developing more efficient warehousing, companies can get the biggest bang for their buck, she adds.

CDNow, for example, plans to ensure that all warehouses back each other up so the company can reroute order shipments through alternate warehouses, if necessary. "We're going to make sure we have extra resources on hand, both at CDNow and at the warehouses, to make sure orders are processed as quickly as possible," Belew says. The e-tailer will continue to use a proprietary system that tracks orders and transmits the information to various warehouses, and it will continue to outsource fulfillment to third-party companies, she notes.

E-Tailing Lessons Learned
Here's how to woo and please customers consistently to avoid government reprisals:

  • Focus on having strong documented processes in place that lead to highly repeatable, predictable processes. --Dave Morrison, COO, Patriot Computer Corp.

  • Try to be as proactive as possible instead of waiting for problems to occur. --Amy Belew, vice president of customer service and operations at CDNOW Inc.

  • Focus your energy on making your warehouses more efficient, and devise a plan that allows warehouses to back each other up. The key is warehouses--not IT systems. --Seema Williams, senior analyst at Forrester Research

  • Know the technicalities of the FTC regulations and create systems designed to prevent violations. --Rich Secor, CIO of SmarterKids.com

  • Don't shortchange resources, especially during the holiday season. And don't wait until December to bring them onboard. --Amy Belew

  • Design your company around the goal of providing the best possible customer experience, and you'll have a better chance of avoiding problems. --Rich Secor
  • Convinced that internal control of warehousing will lead to more efficient fulfillment, other companies are reclaiming warehousing from outside vendors. SmarterKids.com, for example, has begun managing its own warehouse in Mansfield, Mass., to maintain greater control over service, says Secor. "We have tried as much as possible to avoid outsourcing any function that could affect customer satisfaction, and we believe we can provide better service by taking it in-house," he says. "[By doing so,] we can integrate the fulfillment and customer service functions better--things like gift wrapping and attaching gift cards to packages," Secor adds.

    More Steps to Ensure Customer Smiles

    To truly ensure a trouble-free holiday season, many e-tailers--both those embroiled in this year's FTC actions and those not directly affected--are taking additional steps. Patriot Computer, for example, is installing new fulfillment systems designed to cut one to two days off the end of the fulfillment cycle. The company also is moving from a build-to-order system. In its place, Patriot Computer is installing a Web- and SQL-based build-to-forecast system from Syspro Ltd. of Manchester, England, which should be running shortly after the 2000 holiday season, says Morrison.

    CDNow has reworked its organizational structure, making customer service and fulfillment the responsibility of one department. Both are now Belew's responsibility. By making customer service and operations--including fulfillment--the ultimate responsibility of one division, the two areas can work more seamlessly, says Belew.

    Even SmarterKids.com, which did not suffer any significant fulfillment or customer service problems last year, continues to improve its operations. In addition to appointing an FTC compliance officer and reclaiming its warehousing duties, the company now generates a daily audit report that shows orders that need attention or intervention. The homegrown report draws from all the company's systems, including fulfillment, shipping, credit authorization, customer service, and accounting.

    But no matter what systems e-tailers put in place or how they restructure their warehousing, there always will be cases where suppliers sell faulty parts, causing problems such as those experienced by Patriot Computer in 1999.

    "We source from all over the world, and some items can remain on backorder for some time," says CDNow's Belew.

    Too Early to Tell

    E-tailers' efforts will help, but it's too early to tell whether they will totally eliminate customer complaints. "For the most part, we've seen progress since the last holiday season. But we won't know until this holiday season is over whether or not they did enough," says Forrester Research's Williams. "I suspect there will be an improvement, but since the market is growing so fast, [e-tailers] would have had to act faster regardless of whether or not they had problems last year."

    The FTC isn't relying on industry steps. In addition to receiving reports from the companies cited last November, the agency will continue to monitor a large number of e-tailers. The agency begins the monitoring process when it receives customer complaints through its customer response center, which consumers can contact through a toll-free number, says the FTC's Hippsley. "We'll be looking at companies that promise specific delivery times to consumers to ensure a level playing field and to ensure that consumers get the services they have been promised," she says. "But we're hoping we got the message across and they will do a lot better this year in fulfillment."

    Karen D. Schwartz is a freelance writer specializing in business and technology. Based in the Washington, D.C. area, she can be reached at karen.schwartz@bigfoot.com.

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