Report: Shipping Costs Bleed E-tailers Dry

While e-tail fulfillment problems have been a steady source of dissatisfaction among online consumers, a report released Thursday concludes that they also often dampen efforts by Web merchants to achieve profitability.

According to an analysis of e-commerce infrastructure by Jupiter Research, 44 percent of Internet merchants lose money on the multilayered process of shipping and handling.

Moreover, the report said, 37 percent of e-tailers cite the cost of shipping as a major fulfillment headache.

As a result, the study forecasts that one third of Web vendors will outsource their shipping to third-party merchandise suppliers, Internet-based fulfillment networks and drop shippers over the next year. Using third parties is expected to help e-tailers in their quest to slash labor expenditures, speed processing times and lower inventory overhead.

"Retailers, online and off, are realizing that the Internet not only affords new ways of interacting with consumers, but more efficient ways of interacting with suppliers," said Jupiter research director and senior analyst David Schatsky.

Boosting Efficiency

In order to automate the drop shipping process, e-tailers must use Internet fulfillment networks to directly connect them with manufacturing and distribution partners, Jupiter said.

These private trading hubs would allow marketers to boost their supply chain efficiency and improve customer service by overseeing order routing, monitoring performance and conducting real-time inventory checks.

"Merchants that deal with numerous drop-shipping suppliers are finding that fulfillment nets offer huge advantages over the traditional and widespread use of telephone and the fax," said Schatsky. "With setup costs typically in the low five figures, and transaction fees typically in the one-dollar range, Internet fulfillment networks offer a clear economic advantage."

Clean Shave

In fact, Jupiter estimates that Internet retailers may be able to shave up to 25 percent off their labor costs by managing their suppliers through online fulfillment networks.

Accordingly, the report projects that Internet fulfillment networks will see "vigorous growth" in the coming years, as spending for private network infrastructure mushrooms from US$465 million in 2001 to $37.4 billion in 2005.

For their part, fulfillment networks will begin to add an array of services designed to cultivate e-tailer dependency on their products.

Networking Advice

Although fulfillment networks offer e-tailers the ability to eliminate some of the manual shipping processes, the report said one of their main drawbacks is the cost of maintaining communication with outside suppliers.

Jupiter advises that before settling on a particular fulfillment network, online merchants should evaluate prospective providers based on the ease of integration and the amount of work that would have to be redone if a decision were made to switch to another provider.

Unfulfilled E-Shoppers

Fulfillment problems have been an ongoing nightmare for many e-tailers. A report released last month by Accenture found that during the crucial holiday season, as many as 67 percent of online deliveries were not received as ordered, and 12 percent were not received in time for the Christmas holiday.

Similarly, a study from PricewaterhouseCoopers said the most persistent frustration for online holiday shoppers in 2000 involved order fulfillment, the same issue that plagued e-tail heavyweights and fledglings alike in 1999.