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E-tailers turning to third parties for shipping and handling

To cut costs and improve service, many e-tailers will be turning to third-party merchandise suppliers and may use online networks to manage those suppliers, according to a new study.

    To cut costs and improve service, many e-tailers will be turning the shipping and handling of their goods over to third-party merchandise suppliers and may use online networks to manage those suppliers, according to a recent study from Jupiter Media Metrix.

    In a survey of more than 30 online retailers released Thursday, the researcher found that 44 percent were losing money on such costs as labor used in taking a customer's order, the routing of orders to a merchandise supplier, and the transporting of goods to the customer.

    "Retailers are telling us that the use of drop shippers is on the rise," said the author of the report, David Schatsky. ("Drop shippers" are outside suppliers of goods.) "Having a third party hold and manage most of their inventory allows (retailers) to sell a lot of stuff that they don't have to carry in inventory," Schatsky said. "The downside is the overhead costs of managing the communications with the third parties."

    A third of the surveyed retailers said they would use drop ship vendors in the next year. Jupiter analysts are recommending companies use "fulfillment nets" to automate the process.

    This year is expected to be a major one "for companies to realize that they need to outsource the work of handling their outbound and return" inventory needs, said Paul Ritter, an analyst with The Yankee Group. "We agree that this will increase the use of fulfillment networks too."

    Like business-to-business private marketplaces, "fulfillment nets" connect a merchant to a hub that in turn is connected to each supplier. The connections can vary, from a simple browser-based extranet to machine-to-machine interfaces based on Extensible Markup Language (XML), or electronic data interchange (EDI).

    Schatsky said putting "fulfillment nets" in place helps companies cut costs and boost customer services.

    In past years, e-tailers have been criticized by consumers and experts for failing to provide adequate customer service during the holiday shopping seasons.

    The survey found that 37 percent of online retailers cite the cost of shipping as a major fulfillment headache. According to the report, "fulfillment net" providers are popping up in the market to provide services to support procurement and build retailers' dependency on their products.

    Vendors like Managize.com and Ordertrust.com offer fulfillment-net services that Jupiter analysts said enable order routing, supplier performance monitoring and real-time inventory checks.