Dec. 29 2006 10:53 AM

There are many companies either entering or considering entry into the fulfillment industry and many, if not most, do not have any financial performance expectations for their new fulfillment ventures. The reasons for entry into the fulfillment industry will vary from company to company, but the most common reasons are: client request to provide work for the core competency of the business and to change the value proposition of the company. The relatively low-cost for a company to enter into the fulfillment industry makes the expansion of business services, for any of the above reasons, a very attractive proposition. However, many firms find themselves losing money on fulfillment operations after the installation of the service. We will examine several of the underlying causes.


Reasons for Entry

The most common reason for entry is client request. In this most common situation, a long-time client approaches the mailer or printer and requests they consider doing fulfillment for them. In most cases, the client is very satisfied with the business relationship and the performance of the company. However, they are having problems with their fulfillment provider and would like to transfer the service to you. This is the highest compliment for your company, when your client exhibits enough trust and confidence in you to ask to expand your service offering. There is a corollary to this entry reason, which is similar, but in this case your long-time client presents you with an edict "go into fulfillment or we will be forced to pull the business." This · usually means they have been approached by a competitor who has fulfillment in their service offering and have extolled the virtues of single source, cost reductions, etc. The client would much rather stay with you, because they do not like change. Unfortunately, this is the most common reason for entry into the fulfillment business. This situation does not allow the ownership and management of the company to adequately plan and examine the business proposition and develop a long-term strategy to grow the business, but instead puts them in reaction mode.


Providing more value-added services to the basic business process is a primary reason for entry into the fulfillment industry with the primary goal of adding more work to the core competency of the company. In this case, the fulfillment provider usually sees itself as a mailer or printer with additional services. This is a very important distinction because the fulfillment operation is placed in a subordinate roll and will likely be a very low revenue generator and will most likely lose money. Companies entering the fulfillment industry with this approach are likely to eventually drop the fulfillment operation, and face an unusual amount of management time spent on solving problems in the fulfillment operation. They may even lose clients as a result of poor fulfillment performance and find themselves accomplishing just the opposite of their original goal. Many companies in this situation should strongly consider a 3PF partner before jumping.


The enlightened management team from a mailer or printer operation will consider entering the fulfillment business with the goal of not only adding additional services, but changing their value proposition to clients and prospects. The value change would be from a mailer or printer to a solutions provider. Many companies are changing names, company logo and brand image to reflect the newly-added capabilities. Words such as: solutions, marketing support, family of companies, etc., are being utilized to distinguish themselves from competing service providers. They present their companies as being "one-stop" solutions or, to use an old descriptor, "a turnkey solution." These are the companies that have a vision of the future and an understanding of their target markets. They see the value of investing in the fulfillment operation for future growth. They have made a conscious decision to change business proposition from a single service provider to a solutions provider and will work very hard to change the culture of the company. This change does not happen overnight but is a long-term business activity, which will certainly require changing how the business is organized, managed and staffed. Companies in this category are the competitors that have approached your clients and forced you to take action to get into the fulfillment business.


Ease of Entry

Possibly the biggest trap in the fulfillment industry is the ease of entry. This appears to be an easy business to establish and run, and the thought process is that "we already do most of the required activities: receive products, store products and ship products." After all, how hard can it be to put a few products in a box and ship the box? To even further flame this fire, I make it abundantly clear that in the fulfillment business you need only control one metric inventory accuracy. How hard can that be? All that is needed is a building, some racking, a forklift and a few people. You are right so far, and please add a fulfillment operating system to the requirements, SQL and Web servers, a network, plus employees to operate the systems. However, the most important transition is that the fulfillment center becomes a department within the client organization. The most important fact is that your company will enter the service business sector and have to co-exist within your manufacturing (mailing and printing) operation. This is the trap. Your management team will have very little experience with this type of business, and growing pains are to be expected. The manufacturing operation will continue to be the primary revenue and profit generator for some time to come. The most common error made when there is a problem is to try to run the operation and solve problems with the same business model utilized in the manufacturing side of the business. I do not want to paint a totally bleak picture, because there are certainly many success stories to reference and because the secret to success in this business is still relatively easy:  good people, good software and patience. Of course, a good business plan would help out too.


Financial Expectations

Not many companies are as fortunate as mine when getting started in the business. A former employer had his fulfillment center close quickly and without notice, and we were asked if we would like to run the business. The business was awarded to my company and priced in what I termed balloon pricing. There was a set fee each month that covered rent, utilities, personnel, profit, etc. For that amount, I offered to complete a given number of transactions, and all transactions processed over that number in a given month were billed at a transaction cost.


We were fortunate to have a "cornerstone company" as our first company in the business. The cornerstone company will essentially cover your overhead and allow the remaining clients, usually smaller in scope and size, to add the true profit to the fulfillment operation. Of course, we were profitable in our first month of operation. However, this is not the norm. Expectations for the financial performance will vary from company to company depending on what type of work is completed in the fulfillment center.


There are two basic types of work completed in the fulfillment center projects and programs. Most mailers and printers are completing handwork projects in their binderies or handwork facilities, and may choose to keep that work in the current location. However, a 3PF company will complete both types of work, and financial statements are based on · completing both types of work with the same work force plus temporary workers.


Breaking even will take between two and three years from the entry of the first client. This is not to say that you will not be profitable before a year and a half of operation, but that it will take about 30 months to build the business to have a majority of the months being profitable. Most commonly, large project work will drive these high-profit months as you add to your program client base. There is also a seasonal nature to the business, assuming you are in the literature fulfillment business, because most major corporations do not advertise heavily in the summer. The seasonal nature of the business will cause even mature fulfillment centers to have a combination of profitable, break even and losing months within the fiscal year. Diversifying into other industries helps to smooth this curve but is certainly not a consideration for new fulfillment operations.


Contribution My experience in and observations of companies that have mailing and printing operations would indicate that the contribution of fulfillment could be twice as high than that of the mailing and printing industries. This is due primarily to the immature nature of the business and the perceived value of the activity to the client. There are no formal pricing guidelines and comparisons for the industry, which allows each fulfillment center to price based on their individual requirements and what price their market will accept. It is expected that more competition in the fulfillment industry will drive pricing downward; however, I am still seeing wide variations in pricing for the same function. A recent example in the same business region was a variation in price from $2.95 to $15, and many price points in between for other companies. Of course, these were two different companies and two different clients, but everyone was happy with their pricing.


Tom Quinn is the director of Fulfillment Services, Mailing & Fulfillment Services Association. He has over 23 years of experience in the fulfillment industry and was recently appointed director of Fulfillment Services for MFSA. MFSA is the trade association for the mailing and fulfillment service industries.