Article prepared by C. Clint Bolte, C. Clint Bolte & Associates, Chambersburg, Pennsylvania. For additional information please call 717-263-5768, fax 717-263-8945, or e-mail to clint@clintbolte.com.

MFSA-NAPL Fulfillment Conference 2007
Information Fulfillment Projects Becoming More Complex

The third annual joint North American fulfillment conference sponsored by the Mailing and Fulfillment Service Association (MFSA) and the National Association for Printing Leadership (NAPL) drew 161 paid attendees to Louisville, Kentucky April 25-28. This was actually the fifteenth dedicated fulfillment conference for MFSA following the initial one in 1992 in Long Beach, California. The entire membership of MASA (MFSA predecessor name) was only 115 at tha time according to David Weaver, MFSA's Executive Director.

The symbolism of being blocks away from Churchill Downs and only a few days prior to the Kentucky Derby's Run for the Roses must not have been lost on the first time attendees to this conference, the highest proportion of total attendance in many a year. Overwhelmingly printers, the 40+ first timers were anxious to get up to the starting gate to compete more profitably in the fast changing and increasingly demanding fulfillment industry. They nor the veteran thoroughbreds who returned to assure that they remain current were not disappointed with four plant tours, highlights of a national survey summary yet to be published, two dozen poignant seminars, and multiple networking opportunities.

Fulfillment Accreditation Program Announced

Tom Wilde, Chairman of MFSA's Fulfillment Committee and CEO of Boston's W.A. Wilde & Company, announced MFSA's corporate accreditation program and its first three accredited fulfillment companies. Begun as an idea of former MFSA Chairman Jim Pinkin at the turn of the millennium and sheparded through its tenacious six-year planning and criteria development by MFSA's Director of Fulfillment Tom Quinn, Fulfillment Accreditation was described by Wilde as a "branding opportunity for the best in class fulfillment enterprises." The accreditation criteria include 155 operational and technical requirements as part of ten comprehensive standards. The initial accreditation will cost $2,500 for MFSA members with the yearly update review another $500 plus the on-site auditor fee and travel expenses.

The stringency in this process is perhaps comparable to NAPL's Management Plus Award Program except that MFSA's Accreditation highlights the necessity for continuous improvement by the yearly review to retain the accreditation. The first three accredited firms were FRMSI of North Andover, Massachusetts, Louisville Kentucky's Fulfillment Concepts, Inc. and TFC out of NAPA, California.

Knowledgeable fulfillment buyers continually grouse about the difficulty of differentiating between 3PFs and their proprietary claims. Receiving accreditation should speak volumes for those few who can qualify. For additional information contact MFSA's Director of Education Dave Core (dcore@mfsanet.org).

Economy Is Slowing … Productivity Lagging For the First Time

NAPL's Executive Vice President and Chief Operating Officer Timothy Fisher offered the keynote address highlighting the current economy, economic forecast, and details of the third annual survey of fulfillment practices. NAPL's Printing Economic Research Center (PERC) headed by Chief Economist Andrew Paparozzi prepared these. The Economic outlook for 2007 is a slowing of GDP to +2.3%, which is well below the 3.3%, 3.2% and 3.9% increases of the last three years.

A recession is unlikely as strong job and corporate income growth is expected. Inflationary pressures and the inability to pass along price increases have been offset in the graphic communications industry by strong productivity increases year after year for well over a decade. This 2006 productivity gain (+2.2%) lagged inflation of +3.1% for the first time and is a continuation of a downward trend in productivity.

Striking Fulfillment Survey Results

The 2007 NAPL Fulfillment Practices Survey included 31 Mailing & Fulfillment Specialists and 44 Commercial & Niche Printers, which was a solid 20% increase over last year's participation. Participants' profiles again suggest that this is the larger, more successful firms rather than a snapshot of the fulfillment industry as a whole. Their practices and expectations are still valuable as a reflection of this dynamic and evolving value-added service both from the view of printers wanting to get into and improve their fulfillment offering but also to fulfillment buyers who want to compare their own service provider.

M&F Specialists with less than $10 million in sales comprised 92.8% of the participants and whose sales in mailing and fulfillment were 75.7% of total revenues. On the other hand 62.5% of the printer participants had total sales exceeding $10 million with mailing and fulfillment revenues accounting for 15.9% of their total. On a direct comparison M&F folks averaged fulfillment revenues $2,145,670 versus printers $1,553,970 and $2,618,641 versus $1,789,841 of mailing value-add. This would suggest a comparable economy of scale in these two value-add segments.

Print participants are the newbies, as would be expected, with 42.5% offering these services less than 5 years while 82.8% of the veterans - M&F specialists - have been in these trenches for over five years. The top four categories of products stored and shipped for both groups were comparable and included sales brochures, premiums, sales sheets and training materials.

A significant divergence comes in as the fulfillment client profiles are analyzed. M&F specialists average 25 fulfillment clients while printers are double that number. This means the average client revenue of the former is $85,800 versus $31,100 for the printers. This economy of scale difference is significant and surely drives higher relative administrative costs, which tend to be fixed, for the printers. Both groups have solid dependence upon their top five clients with the averages being around 75%.

Detailed operations showed divergence between the M&F crowd and printers; skid capacity utilization was 82% versus 67% with half of the printers barely over 30% utilization. The flexibility and versatility were reflected in the ranges of weekly pick and pack orders between the average and the high; M&F -163.0% and printers - 86.8%.

Revenues for both groups have increased substantially over the past three years; M&F specialists up 58.1% and printers up 68.2%. The most recent year's percent fulfillment gain was in double digits of 41% of the M&F specialists and 37% of the printers. No gain at all was reported by 35.5% of the former and 44.2% of the printers. This might suggest a maturing in the market and perhaps the leaders beginning to "take" from the laggards. Expected annual growth for 2007 is bullish with M&F specialists targeting +16.9% and printers an additional 20.8%.

Disparity in Fulfillment Pricing Continues

Reported fulfillment price trends are revealing. Over the last three years M&F specialists report 10% price increases while printers claim 23.8% bumps. And yet the average increase that stuck this past year and expected for the next is only 1.1-1.2% for the former and 0.7-0.8% for the later. The author draws three debatable conclusions from these price responses; (1) the price increases will not cover expected inflationary increase and therefore adequate margins must still exist, (2) operating efficiencies climb with knowledge of ordering patterns and hopefully climbing volumes, (3) buyers are effectively resisting increases possibly with a threat to leave, (4) relative profitability for M&F specialists must be higher than printers with the former realizing 50% greater annual price increases (+1.2% versus +0.8%) on average clients whose volumes are 275% greater ($85,800 versus $31,100), and most importantly, (5) most M&F specialists appear to understand the higher value of their fulfillment services in the eyes of their clients much better than printers.

Representative pricing comments from leaders were noteworthy; "Complexity of project, quality checks and security requirements" drive costs and prices. "Containing overhead costs while passing along client driven overhead costs" is essential to sustained profitability.

An overall pricing observation hypothesized by this author is that printers are quick learners as they are increasing prices substantially on new clients (+23.8% higher prices in the last three years), as it appears extremely difficult to raise prices once the relationship has commenced. On the other hand printers aren't used to being profitable and therefore the relative increased profitability of these fulfillment services might be making them giddy and nervous. This is not documented as printers are almost universally refusing to report their exact profit levels in their new fulfillment division.

It is interesting to note that two-thirds of the M&F specialists set up their fulfillment operations as a separate profit center while only 42.9% of printers do. The profit leaders of both groups (30%) report that their fulfillment is more profitable than the other parts of their business. (23.8% of printers simply don't know!) Both groups (about 38%) report increased profitability trends for their fulfillment centers over the past three years with nearly 60% expecting improved profitability for the next two years.

The driving impetus for printers to expand into fulfillment was evidenced by the response that 73.5% of the inventory stored by printers was also printed by them. For fulfillment clients who also buy printing 74.4% of those printers report that the print volume from these same clients have increased with 65.1% reporting that these same client's profitability to the printer also improving. Loyalty is another reconfirmed fact as turnover among clients buying both fulfillment and mailing is 3.3% while turnover among clients buying only printing is 9.6%.

Both groups report an increasing trend in more complex fulfillment projects (65.5%-M&F, 56.8%-printers) and a full quarter of both groups report turning down fulfillment projects that were perceived to be too complex.

Peter Gillet, Managing Director of the United Kingdom's MarketPoint Global, presented insightful comments on the international fulfillment scene. Global marketing strategies and database management exist but "all campaigns are local," commented Gillet. His suggestions on how to find international partners to implement these local campaigns certainly suggested an extraordinary opportunity for MFSA and NAPL to serve as facilitators in this process. He advised; (1) prepare prospect list from industry organizations, (2) e-mail profiling questionnaires to narrow the list, (3) visit several to get the "feel" for their organization, (4) try to make your business a big part of their business for a win-win relationship.

In Consultant Jim Rushing's absence, conference organizer Tom Quinn presented an extensive Site Visit Checklist, which typically would be followed by a fulfillment buyer for his/her one, and only visit to the 3PF's warehouse. This includes the overall appearance of the operation and warehouse, customer service interaction, pick and pack areas, IT capabilities and resources, kitting and hand assembly processes, layout and work flow. Because prospects visit very infrequently, this checklist would be invaluable as both a training and priority format for all 3PF employees as well.

In the panel discussion on "Building a Fulfillment Sales Force" Rob Young of Transcontinental Direct out of Warminster, Pennsylvania profiled their successful sales professional as "great communicators…with intellectual bandwidth to manage complex program(s), who understand and are motivated by annuity-based selling and compensation."

Leaders Provided Invaluable Tours

The first full day of the Fulfillment Conference has traditionally generated a good deal of enthusiasm as it feted tours of local mailing and fulfillment specialists and printers offering fulfillment services. This is like a personal tour of the stables before the thoroughbreds leave the paddock regaled in their corporate colors for the big race. The Louisville Conference included a midnight tour of UPS' WorldPort, their largest worldwide distribution air hub. One hundred and ten aircraft (called "brown tails") arrived in 90 second increments, unloaded their cargo, sorted, reloaded and departed within a timeframe typically midnight to 3 a.m. Ninety companies have moved to Louisville to take advantage of this UPS' supply chain solution.

Ranked No. 1 for social responsibility for the third straight year by Fortune magazine, UPS representatives explained how they went from 100% employee turnover in their midnight part time jobs in 1998 to their current 95% retention rate. Early in their history, UPS offered 100% paid group medical coverage for the employee and family, but this was not sufficient to attract quality long-term employees to these part time slots. In conjunction with the state of Kentucky and local Louisville colleges and universities UPS put together a package to offer free in-state college education to any employee willing to work 15-20 hours a week on this midnight shift. In order to participate in UPS' MetroCollege program they simply have to get accepted and make their grades regardless of what school or major they might choose.

When notified that they are enrolled, UPS gives these student-employees an additional $65/month to cover books and incidental expenses. The student-employee gets a major transition bonus of $500 when their credit hours move them from freshman to sophomore year. This one time bonus climbs to $1,000 as they enter their senior year. There is no obligation for them to continue to work for UPS upon graduation though many receive full time job offers. It is interesting that of the 6,000 midnight shift workers, only 2,000 are college students. The very high overall retention rate for this part time crew is attributed to the personal motivation and quality of these students, many of whom would not be getting a college education without this program. This ambition and commitment carries over to the entire nighttime workforce.

Last year UPS announced a 60% expansion over the already huge 304,000 hourly package handling capacity that just came to fruition in 2003. This $1+ billion dollar investment is expected to be complete by 2010 and is being driven by the expectation of a burgeoning international packaging trade. MetroCollege will play no small role in filling the new employee count demands of this growth as well. There is little doubt that the Fulfillment Industry will be a direct contributor to this exciting economic expansion.

Fulfillment Concepts' (FCI) tour highlighted their web-based services and their unique disaster contingency and business resumption planning which has been defined as critical by a number of their financial services clients. Their ISO 9001 certification initially in 2000 is another distinctive FCI accomplishment and defining element of their business strategy.

The aNETorder, Inc./ American Mailers' tour showed a highly specialized book fulfillment operation that includes commingling and an innovative returns processing service. Few fulfillment operations offer the economy of scale for returns processing as aNETorder, but every fulfillment operation is in the returns processing business whether they care to admit it or not. The dedicated area isolation and timely team processing are lessons every 3PF can learn.

Preferred Marketing Solutions, the in-plant printer for Papa Johns' Pizza, was the final tour host. This is no typical in-plant with half of their $40 million annual sales coming from the commercial market place as insourced volume. The fulfillment operation included a battery of sewing machines custom embroidering names and logos on employee uniforms for distribution around the world. More than one conference attendee commented that providing their own late night kitting crews with a bushel of Papa Johns warm bread sticks would be a nice treat.

Editorial Conclusions of This Author

This LooVille gathering, the locals kept trying to teach proper pronunciation to all their visiting guests, raised the bar for its attendees versus past fulfillment conferences. The MFSA Accreditation process should only get tougher in future years reflecting the growing demands of fulfillment clients and complexity of fulfillment requirements. To integrate some of the questions and features of the NAPL Management Plus Award program into the MFSA Accreditation process and visa versa would seem to be a logical extension of this strong collaboration of these two well regarded trade associations. And in turn both programs would improve.

With DRUPA coming up in a year this might be an excellent opportunity for these two associations to put together a database of potential EU fulfillment partners to help their members get a head start on this potential client demand. They could visit some of these potential partner sites in conjunction with what is being touted as the "Inkjet DRUPA."

The NAPL survey of fulfillment practices again affirms that printers, even those who have been offering fulfillment services for a number of years, have got a lot to learn from these veteran Mailing & Fulfillment specialists if they want to optimize their fulfillment profitability. Or for those printers who choose not to invest in sending their top management personnel to future MFSA-NAPL Fulfillment conferences and participating in the MFSA Accreditation process themselves, there is one more option. Go buy an M&F Specialist. But be ready to pay a higher EBITDA multiple then printers are selling for because the M&F Specialist's proven, sustained profitability warrants the premium.

Article prepared by C. Clint Bolte, C. Clint Bolte & Associates, Chambersburg, Pennsylvania. For additional information please call 717-263-5768, fax 717-263-8945, or e-mail to clint@clintbolte.com.