Contracting for Outside Fulfillment

JOHN ZOTZ, STANFORD

Steps in Outsourcing Book Order Fulfillment

The decision to use an outside vendor for Book Order Fulfillment (usually encompassing all or some of order processing, customer service, A/R, collection, inventory management, shipping, returns, and warehousing) is a big step. It is typically done to reduce expenses, although it can also be done for space or staffing reasons. Even if there are no current internal issues, periodically looking at outside vendors can be a good idea since it can suggest whether you are missing an opportunity to improve the bottom line. Over the past few decades, almost every publisher who moved to outside fulfillment has stayed with that solution.

In addition to outsourcing book order fulfillment, another possible option is to partner with one or more of your peers in a joint fulfillment venture. Although this option has similarities with outsourcing, it also has some distinct differences because you will continue to be directly involved with managing the operation.

Therefore, only some of what follows applies if you elect to undertake a joint fulfillment operation.

The Investigation Process

The measurements used to compare and make decisions about internal vs. outside fulfillment fall into two broad categories: quantitative criteria (transactions and costs) and qualitative/service criteria (quality, trust, processing times, etc).

Quantitative Evaluation Criteria

Assuming your Press participates in the AAUP Statistical survey, you know your fulfillment costs and how they compare to other presses of your size and to AAUP members as a whole. The AAUP statistics and most presses measure fulfillment monthly fees as a percentage of net sales. Most outside fulfillment vendors also charge that way, but some charge on a transaction basis. Transactions are defined as occurrences, as in the number of books shipped, orders processed, etc. Using percent of net sales is much easier to understand and forecast but the transaction-based costing lets you and the vendor tailor costs to match the kind of publishing you do. If, for example, you typically publish and ship expensive books in full-cartons, the vendor using transaction-based charges will usually be less expensive, maybe half as much, as one that charges fulfillment on a percentage of sales. In order to make a decision regarding outsourcing your fulfillment operation, you will need to measure your current costs against projected costs assessed by the fulfillment vendor. Therefore, this paper will focus on percent of net sales as the primary tool for comparing costs.

In addition to monthly fees, other quantitative evaluation criteria include overstock (excess inventory charges and excess return fees). Other monetary considerations include the cost to move stock from current location to the outsource vendor's warehouse and the charge to pulp excess stock and/or damaged stock.

Qualitative Evaluation Criteria

In addition to operational costs, there are the qualitative considerations, many of which are not as easy to compare. Examples are: the changes needed to your internal controls (auditing a remote operation), the ability to implement special shipping procedures, the value of in-house customer service, your willingness/ability to let go of hands-on management of fulfillment, the importance of a short time interval between a decision to ship and the actual shipment, the distance the new warehouse will be from your printers (affects inbound transportation cost and time), insurance considerations, and your state tax laws (inventory in another state might trigger sales tax issues). Three other critical qualitative evaluation criteria are royalty accounting, access to data, and print-on-demand options.

Royalty accounting is an important consideration when looking to outside fulfillment. Outsource vendors who specialize in fulfillment for book publishers usually have full-featured systems to capture and report royalties. They can either generate your statements or provide the raw data to allow you to create your own. If the vendor does not generate statements, you will need to maintain your current royalty system and be sure to get the necessary data from the outsource vendor at the appropriate times.

Accessibility of data from the vendor's fulfillment system is another criterion to assess. If your order processing system is currently in-house, you can probably get historical sales, inventory, and other such data quickly and in detail. If you rely on an outside vendor for fulfillment, you need to be sure they provide equivalent service. Otherwise, you must measure the value of not having data just when you need it. Many presses might be satisfied with a full list of printed or downloadable reports each month. Others might want raw data to import into their own press or university systems. Others might want the ability to instantly query their data any time of the day. It is important to get into the detail of how that information will be accessible as soon as you start your conversations with a potential vendor.

Then, there is the impact of using print-on-demand (POD). Whether you do POD now or plan to in the future, you need to know how any outside fulfillment vendor will handle it. Do they have a current relationship with a POD printer? Or, do they do POD in-house themselves? You want your vendor to forward POD orders to a digital print facility to print and ship directly to your customer. That makes fulfillment quicker, more accurate, and less apparent to your customer that you are filling the order from multiple locations. If it is done with a separate process (mail, e-mail, fax) there can be delays in filling orders.

Other

Moving out of your own warehouse brings cost savings. The rent on the warehouse space will be eliminated, as will salary and benefit costs of any staff that are no longer needed. Because close-down costs in the first year will be unusually high, be sure to look only at future years expectations in order to make an accurate comparison.

Getting Started

Identify outside fulfillment suppliers by checking with other presses of your size to get suggestions. You can also consult Publishers Weekly and other trade magazines. Every industry that has a product to store and ship has a handful of companies specializing in fulfillment and distribution of those products. But it is safest to stay with one that specializes in the distribution of books, especially because of the royalties issue. For that reason, presses similar to yours would be the preferred source for recommendations.

Measuring your current operation costs with those of an outsource vendor

Typical transaction criteria:

(1) Your cost as a percent of annual net sales. Wherever possible, be sure your internal costs include all and only those costs that are included in the industry data.

(2) It is useful to have the following data collected for the most recent 2-3 fiscal years:

• Annual gross sales and returns in units and dollars

• Titles in inventory: total, frontlist and backlist; expected changes in the future

• Units in inventory at fiscal year-end, highest and lowest month if there is a large variance from the year-end number

• Royalty contract types: pay basis, rates, breaks, etc.

• Average new titles published per year

• Average titles placed out-of-print per year

• Invoices and credit memoranda per year

• Average and median lines (titles) per order and return

• Average and median books per order and return

• Average total books shipped (units and dollars) annual and by month

• Average total books returned (units and dollars) annual and by month

• Average books in storage by month past three years

• Stock transfers: number per year by month; titles and books per month

• Complimentary orders and units: totals and what the high and low months are throughout the year

• Number and kind of special shipping/warehousing processes you have (making sets/kits, shipping books that include marketing letters, special labeling, re-jacketing of trade returns, EAN/ISBN bar-code addition or corrections, etc.)

The last of these can be especially difficult to measure but can also add a percent or more to your cost of net sales. For these the vendor will provide job type rates, or just an hourly rate to cover all of them. You will need to know what volume of these jobs you do in order to include them in the outside cost comparison.

You also need to let any bidder know of and provide a cost for any other special requirements you have. You cannot expect the bidding vendors to be aware of any unusual aspects of your operation. The better the information you supply, the fewer surprises you will have later.

Analyzing Vendor Responses

Vendors who use percentage of sales to charge clients will take the above data and respond to you with an annual cost based on those figures. It might be in the form of a fixed percent for net sales plus specific costs for non-sales transactions. Vendors who use transaction-based pricing will provide you with a list of the rates and let you do the math. In either case, the total is what you will use to compare to your inside costs.

One good way to compare the bids to each other and to your own internal costs is to use your most recently completed fiscal year data. That provides a comparison between what your actual costs were last year to what they would have been had you been using an outside supplier. But you also need to apply the bids forward if your publishing program is going to change or grow in any significant way.

In addition to the on-going costs of using an outside vendor, you will also need an estimate of the cost of the transition to them. These costs include:

• setting up your titles, royalties, and the many ancillary data tables on the vendor's system • the cost of moving out of your existing facility • close-down costs of the existing facility assuming it is your own • transporting the books to the new facility

The end result of any bid is what you need to compare to your own costs. Again, percentage of annual net sales is the recommended yardstick.

The Decision

Once you have the operational costs, you also need to evaluate the non-sales based criteria. Are you comfortable with the vendor -- are they people you can work with? Remember, they will now be your contact with those who buy your books. Do they provide adequate level of information, monthly and on an ad hoc basis? Can you create your own reports or do you have to rely on their standard set? Do you have to pay for any new reports you need? Is their system accessible 24 hours, every day of the week?

Vendor Stability and Location

How long has each bidding vendor been in business? Are they investing in new technology and equipment? How many clients do they have and who are they? What is the vendor's financial viability? You will be trusting them to collect your sales accounts receivable. Depending on how often your contract says they pay you, this can be a very large number and will now be at some risk compared to when you collected it yourself. In addition, you need to verify if the vendor pays on cash receipts or receivables.

Has the vendor been growing and if so, how fast? You may not want to move to an outside fulfillment vendor at the same time they happen to be bringing in one or more other large clients. Your press can get lost in the shuffle. If you want to move there, schedule to do so when they can handle you. If they are losing clients, where did they go and why? What are their strategic growth plans? Are they likely to be acquired, which would mean some disruption in your fulfillment and distribution for a period of time.

Where is the distribution center? Is it close to where you do the bulk of your printing and binding? The cost of moving newly printed books or journals from the printer to your place of distribution can add up. The closer the two, the less your inbound freight expense.

Check With Other Clients

Get a list of publishers that your preferred vendor handles. Don't just use the few they give you, get a list of all of them and choose which of them is most similar to your press's publishing profile. Call them to see how things are going. Some questions to ask might be: Are they happy with this vendor? How long have they been using them? Have the costs been what they expected? Any surprises? Is the vendor easy to work with? Who there is vendor's best contact person--the one that can really get something done in an emergency? What has been the most serious problem and how long did it go on? Does the vendor pay on time for sales collected?

Check With Your Customers

It should go without saying that what any vendor tells you about its services to be verified. You should call some of your largest and most important customers to see what their experiences have been with the vendors under consideration. University press buyers at retail chain stores and wholesalers will have a good idea of any problems a fulfillment vendor might have. They can usually tell you if service has reliable and if there are any "red flags."

Conclusion

Moving to outside fulfillment and distribution is a major decision for a press. Using the right outside vendor will create real savings to the press once the transition period is over. The key steps are knowing your current transaction numbers so that you can make a good comparison, including all the important financial and transactional criteria, checking references (both client and your customers) and taking what you find out very seriously, and selecting a vendor with both stability and a management team that you and your staff can work with over the long-run.

Additional Resources

Lisa Emerson, Chief Financial Officer of the University of Illinois Press, has created additional documents that may be of use in evaluating outside fulfillment options, including a sample RFP and an vendor evaluation worksheet. Outside Fulfillment Sample RFP (PDF) Outside Fulfillment Evaluation Criteria Worksheet (Excel)