Control System Approach to E-Commerce Fulfillment: Hewlett-Packard's Experience (2001)

E-commerce has brought a new sales motion to the market ... outlines a control system that is uniquely suited to the demand fulfillment in an ecommerce environment... when this new system was put in place it not only reduced inventory substantially but also reduced the required overhead. E -commerce has brought a new sales motion to the market. E-retailers have been hard at work developing their front-end interface and spending resources on advertising to spur revenue growth. However, the e-fulfillment motion lags behind in the development of the backend order fulfillment capabilities. Considering the relatively pure and unaltered demand signal enjoyed by ecommerce retailers as well as relatively short lead times, demand fulfillment should be an e-commerce strength. But it is not. This article outlines a system that can drastically improve the demand fulfillment and at the same time reduce inventory and overhead requirements. The improvements are driven by more accurate forecasts as well as by a better response to forecast and inventory quantity error. LESSONS LEARNED FROM THE 1999 HOLIDAY SEASON The holiday season of 1999 (Thanksgiving through Christmas) has helped us to recognize the true state of ecommerce and the problems related to eorder fulfillment as we enter the 21st century. First of all, the industry realized a substantial (and greater than expected) growth in sales. Forrester Research Inc. estimated that revenue from e-retailers during the 1999 holiday season would total $4 billion. Actual results surprised the industry when holiday spending quadrupled from the same period of the previous year to reach a staggering $12 billion! Much of this growth was driven by advertising spending (e-retailers spent over $1 billion on TV, radio, print, and billboard advertising in 1999) and investments in enhanced front-ends to improve the interface to the end customers. The industry took steps to address the lessons learned from the Christmas season of 1998 during which front end design was constrained throughout, sites slowed to a crawl, and shoppers struggled to make their way through sites because of difficulties in navigating. Although these year-to-year results sound like a success story, there is still a great deal of room for improvement. While American consumers rang up online sales in the 1999 holiday season, some e-retailers -both big and small - failed the customer service test by not filling their online orders in time for Christmas. While investments were being made to correct the front-end, shortcomings in back-end development in terms of correct inventory levels and reorder logic left many customers dissatisfied as they scrambled to the mall to find presents they thought were in the mail. Satisfaction levels of web shoppers are falling (in a recent survey by e-BuyersGuide.com, satisfaction levels came down as low as 52%) and e-retailers are losing those customers they fought so hard to attract. Jupiter Communications estimates that attracting an e-customer ranges from $30$70 for books to $100-$200 for hardware. With these sorts of investments required to attract customers, the risk of losing them due to out-of-stock situations is extremely painful. Toysrus.com said that it was not able to deliver as much as 5% of its 1999 Christmas orders. Each customer that did not receive their order on time received $100 and an apology from Toys R Us. Etoys experienced a similar problem. This forced BancBoston Robertson Stephens inc., an investment firm, to downgrade its stock. As a result, its stock price dropped by 16%. In response, many e-retailers now see the need to stock even higher levels of inventory to satisfy a hard-to-predict market of impatient buyers. For example, eToys is building a 450,000 square-foot warehouse on the East Coast, and are not alone. Hasn't this exact challenge been experienced in the traditional retail channel? The traditional fulfillment motion is in a constant balancing act between excess inventory and lost sales due to stockouts and shortages. …