Most Popular Reads
- How to Master Product Photography on a Tight Budget (We Did it With Less Than $50)
- Ecommerce Shipping: Your Step-by-Step Guide to Shipping Profitability
- The Complete Guide to Advertising on Facebook: Strategies That Convert [in 2017]
- Ecommerce Return Policy Template: How to Write a Returns and Refunds Policy to 3X Sales [Examples Below]
- Ecommerce Trends: 141 Stats Revealing How Modern Customers Shop in 2017
You’ve got a killer product, nailed down your marketing strategy, and are finally getting in front of customers. The orders are rolling in and your business is primed for explosive growth.
That’s it, right?
Not so fast. While product-market fit and user acquisition are undoubtedly crucial to your business, ecommerce order fulfillment is the engine that keeps your car running.
Let’s start from the beginning.
What is order fulfillment?
Fulfillment encompasses the entire process of receiving an order and delivering it to a customer. As anyone well-versed in operational ecommerce is aware, this actually encompasses a number of complex steps throughout the supply chain that all play a significant role in how customers perceive your business.
To name only a few of the steps, proper fulfillment requires:
- Warehouse organization
- Order management
- Customer communication
But you may not have to do some — or all — of those processes in-house.
If you are a medium-sized or growing business, it’s likely that you have begun to investigate order fulfillment services, and might have experimented with one already. While small businesses can often manage their inventory, packing, and shipping, as the operation scales up, additional support is needed and beneficial.
Product fulfillment is the most important artery supporting the overall health of a quickly growing ecommerce business. Understanding what options are out there, how they can help, and which is best for your business is a critical decision-making process.
In this guide, we’ll walk through everything you need to know about three of the most popular strategies:
- Third-party ecommerce fulfillment
And we’ll look specifically at the following in regards to each of your options:
- How to define the various industry terms
- The advantages and disadvantages of each technique
- For which companies or business models dropshipping makes the most sense (and why)
- For which companies or business models third-party fulfillment makes the most sense (and why)
- How to choose an order fulfillment system
- When it’s time to establish your own product fulfilment and distribution center
- Next steps for your business right now
The ultimate goal with this guide is that you understand what each fulfillment technique is, when to use it, how it works, and how to get started. You can then select the right solution to take your company to the next level and ultimately sell more. Let’s dive in.
Defining Order Fulfillment Terms
Let’s take a look at how the order fulfillment process works in three common models.
With dropshipping, inventory is not owned before the sale is made.
The seller is a middleman, often never actually seeing or “possessing” the product, but rather focusing on marketing it to customers and making sales.
Once goods are sold, the seller has them shipped directly to the customer from a dedicated dropshipper, or the manufacturer.
Stores that drop ship deal exclusively with marketing and branding, but outsource the logistics of ecommerce, i.e. the fulfillment.
There are a variety of dropshipping types –– and in all of which you, the seller, remain the middleman.
Say you sell furniture that you market through both your website and a brick-and-mortar showroom. With the dropshipping model, every time a customer places an order, you would then place an order with your source.
By doing so, you keep nothing on hand and your profit is made from the difference between your retail price and the price you pay your source for each product (along with any other associated costs).
Here is your profit calculation for this model:
Profit = Retail Price – Price Per Product Bought from Dropshipper
The dropshipping benefit:
It isn’t just startups using dropshipping. Brands like Macy’s and Lord & Taylor use dropshipping from their suppliers to alleviate risk (i.e. the risk of buying too much of a product that just won’t sell).
Dropshipping helps both startups and larger organizations understand what the market wants before committing fully to creating a custom item, or buying in bulk.
With third-party fulfillment, inventory is owned before the sale is made. The seller often purchases or manufactures the product, stores the inventory with the third-party company, and then markets the product in order to sell it.
When an order is processed, the third party (NOT the online store) packages the order and ships it to the customer. Third parties also usually help with COGS and economies of scale.
Let’s continue with the same example of a furniture business. With third-party ecommerce fulfillment, you may still have a website and showroom for marketing, but when a customer places an order, you already have the inventory.
Your third-party logistics provider (3PL) is contacted (this can be automated on your ecommerce platform), and they package the product and ship it to the customer. Your profit will be the remaining difference between the retail price, the price you pay per product, and the fees you pay your third-party provider.
Here is what that looks like:
Profit = Retail Price – Price Per Product – 3PL fees
The 3PL benefit:
Using a 3PL to outsource picking, packing and shipping frees up your time to focus on marketing, finding net new customers, nurturing repeat customers and more.
Brands of all sizes use third party fulfillment, and most 3PLs integrate directly with ecommerce platform like BigCommerce, so once someone places an order, the system alerts the 3PL to pick, pack and ship –– no manual work on your end needing to be done.
3PLs are best for brands which have their own, unique product (in dropshipping, you are using a supplier’s product), no inventory space and want to focus on acquisition rather than shipping.
Self-Fulfillment & Shipping
With self-fulfillment (or “direct fulfillment”), you own the inventory and fulfill orders yourself — no outside party involved.
Often, a warehouse is leased where pickers and packers handle the orders and a WMS (Warehouse Management Software) is purchased as well. The warehouse usually acts as the distribution center, or “hub” for all of your fulfillment.
In our same furniture business example, you have your own warehouse space for storing inventory and handle fulfilling the orders in-house. You might even use your own workforce to pack and ship items.
In the self-fulfillment model, profit is the difference between your retail price and the costs associated with buying inventory, storing it, and fulfilling orders.
Profit= Retail Price – Inventory Buying – Inventory Storing – Fulfillment costs
The self-fulfillment benefit:
With self-fulfillment, you are in control. For startups, choosing self-fulfillment may save you money (though certainly will cost you in time) as you pick, pack and ship items yourself.
For larger organizations, self-fulfillment gives you control over exactly how your items are picked and packed, and when they are shipped to meet customer expectations.
Brands choosing self-fulfillment are often particular about the delivery experience, which means more control during packing is required.
Advantages & Disadvantages of Each Fulfillment Technique
Although a drop-shipping model creates an easy and inexpensive way to add products to your online store, those same low barriers to entry are a double-edged sword.
This can be a great way to get going, and for efficient operations, can even sustain growth. Understanding the pros and cons before you start is crucial to drop-shipping success.
- Easy to start: Drop-shippers provide the products and the shipping, so all you need to do is focus on sales.
- Minimal business development: You’re leveraging the network of your drop-shipper, instead of personally building the relationships with every supplier. Essentially, every new partner allows you to grow by a significantly large number of new products.
- More products, faster: Growth in ecommerce begins with adding more products to your website. Integrating a drop-shipper’s products with your business is simple and straightforward because all you’re doing is supporting the links and learning the prices—not lining up any other part of the logistics.This allows more people to discover you and increases the number of touchpoints by which interested shoppers can encounter your brand.
- Affordable: Low overhead makes drop shipping a great starting place for online retailers. All you do is pay for inventory when a sale is made, so you avoid operational expenses like warehousing. Profitability is not guaranteed, though, which we’ll get to in the next section.
- Test before committing: Since you don’t incur overhead, you can test out the viability of new markets for existing products anywhere you can establish a drop-shipper service.
- Focus on what you do well: The convenience of a hands-off product fulfillment experience thereby enables businesses to focus on other priorities, which is especially advantageous to new companies.
- No customization: Drop shipping usually means virtually no support for custom products. To achieve this type of support and customization, your dropshipper would have to function as a warehouse. Unfortunately, this is not likely unless their margins on custom products were worth the time and effort — in which case, the margins would likely not make sense for you.
- Lower quality control: Since the seller is removed from the fulfillment process, you’re entrusting your brand’s reputation to another party — while maintaining accountability. Buyers usually don’t think about fulfillment models or drop shippers. If a defective product arrives or there is a miscommunication about the shipment, your customer doesn’t want to hear that it was out of your control; all they care about is the overall experience.
- Reduced brand power: Your products are produced by others, so it’s more difficult to establish a unique brand. The reduced quality control only increases the risk to your brand.
- Competitive (dis)advantage: Low barriers to entry mean it’s hard to establish a competitive advantage over other businesses. You’re competing on price, and that can easily become a losing game.
- Scale: Logistics can become challenging as a business scales up, especially when coordinating with multiple drop-shippers.
Third-Party Ecommerce Fulfillment
Third party fulfillment and warehousing can provide you with a national or even global footprint of warehouses, allowing you to reach out customers faster while taking advantage of shipping discounts.
However, picking, packing, and storage fees can cut into your profit margin, particularly for slim-margin stores.
- Inventory can be purchased in bulk in order to improve profit margins.
- No investment is required for warehouse space/real estate, WMS software, or a workforce to pick and pack orders.
- There is an added convenience of outsourcing the process to a trusted professional.
- Shipping discounts can be much better than if you were to negotiate on your own.
- I.e: Your business ships 5,000 packages per month, but the third-party ecommerce fulfillment company may be handling 150,000 orders per month. They’re going to be able to get better shipping rates with FedEx/UPS than you can alone.
- Quality can be compromised.
- You have to do your due diligence: a third-party ecommerce fulfillment company controls your ecommerce business’s final handoff of value to your customers. In other words, they have the opportunity to make or break your customer satisfaction levels, which affects the lifetime value of these customers on your business.
Get Started with a 3PL Now
Self-fulfillment, when done correctly, can add a huge competitive advantage to you store.
The problem is it can be extremely capital intensive (given the warehousing), and one needs to think carefully about the location of their warehouse, as well as the time it will take to operate your own logistical process on a day-to-day basis.
- It offers 100% control of inventory and the pick, pack, and ship process.
- It can be low-cost when the business is small because you are just paying for shipping (and doing the work yourself).
- Anyone can do it. You don’t need any contacts (as long as you have space to store products, address labels, and packing resources such as packing slips).
- For businesses shipping significant volume, negotiated shipping rates through FedEx, UPS, and/or USPS can become a competitive advantage.
- It is time-consuming. Packing all of the products yourself will take time. As orders increase, this can take up most of your day.
- It is costly as the business grows and can be very burdensome for a young business. You need the following:
- Warehouse space
- Warehouse equipment
- Additional staff
- Order fulfillment software requirements
With these pros and cons in mind, let’s look more closely at how each technique works, situations where each is most beneficial, and tips on getting started.
When Does a Drop-Shipping Model Make Sense?
Being that drop-shipping has a low price of entry and therefore presents a limited amount of risk, it can be a good solution for a lean startup looking to break into a market, or for an established business that wants to test out a new market.
Let’s dig into how this technique can be utilized for companies of your size.
Drop-Shipping for Startups
Let’s say you’re a travel blogger with tens of thousands of followers. A lot of your followers want to get your “swag,” such as hats, t-shirts, and the new travel bag that you designed.
You’re not sure if you want to invest a ton of time and money into a new ecommerce business, but you find an on-demand tee-shirt printer and hat embroiderer who will drop-ship orders for you.
By utilizing them, you can start processing orders and have the drop-shipper print and embroider your products as the orders come in. If orders really take off, great, then you know the idea will work and you can look into ordering your shirts, hats, and whatever new products you want to buy in bulk.
If they don’t take off, then you’re not in a bad position because you haven’t built up an inventory.
Drop-shipping allows you a chance to break into a market, establish your brand, and generate a small amount of income that you can use to fuel bulk purchase orders and eventually increase your profit margins.
It can be a smart tactic for startups, but you should note that this isn’t the same path you’d take if you were an existing company looking to try out a new market.
Use Printful for Custom Swag Drop-Shipping
Drop-Shipping for Existing Companies
Let’s say you run an ecommerce store selling high-quality children’s toys. You’re great at what you do and have earned a very loyal following with your customer base.
Plus, you have a wonderful relationship with your third-party fulfillment provider, which handles all your inventory coming in from suppliers overseas, as well as a few boutique suppliers in the U.S.
You decide that you want to explore other channels that the company can enter with new products. Given the strong customer base your business already has, you decide to test out sales for quality child strollers.
At this point, you could look for a mass supplier for strollers, invest in an initial bulk order, and begin marketing them to test customer interest. However, you are then at risk of losing your investment if the products don’t sell, or at a minimum, tying up cash in a bunch of inventory that sells very slowly.
On the other hand, you could use the “bullets before cannonballs” approach, where you test the waters before going in full-force.
Do this by hiring a drop-shipper and beginning to market the new product lines to test customer interest before investing in the products.
This strategy effectively removes the risk, allowing your established business to remain agile while testing a new market.
Sure, your profit margins may be lower on a per-unit basis, but partnering with a drop-shipper allows you to instantly launch a new product on your online store and test your assumptions before making a big cash investment — no warehousing required.
Lando Landis, founder of RockerRags, sells apparel for those seeking a rock-and-roll lifestyle.
Most of his apparel sells for less than $30, but customers were still eager to purchase versions of the classic Pan Am luggage sets.
Rather than tie up several thousand dollars in the Pan Am inventory, Lando established a drop-shipping relationship with the manufacturer to handle the order fulfillment for the Pan Am merchandise.
As Lando explained,
“This ended up being a great move because demand for the Pan Am product line tends to be pretty cyclical. Around the holidays it spikes, and sometimes in the spring. Because of the drop-shipper, I don’t have to worry about allocating cash to buy inventory up front but I still get the advantages of offering the products for sale online.”
How to Land Your Drop-Shipping Partnership
Dave Hermansen, who operates StoreCoach, helps businesses and entrepreneurs establish and operate their online stores.
Dave operates nearly 60 independent stores of his own, 80% of which utilize drop-shipping fulfillment to some extent.
Dave has the following tips:
- Find the top ranking specialty store for the product you want to drop-ship: Do research on the Google search volume for these products and the top selling brands, to better understand what opportunity exists if you were to acquire a small % of total search volume and sales.
- Go to the root: Use Google to find the manufacturer for the product/brand. Most of the time the brand and the manufacturing company use the same name, (think Sony products and Sony manufacturing) but other times things may be less obvious. A simple (or advanced) Google search is the best place to start. You want to find the company who owns the manufacturing process of the products you want to sell, and then get the contact information for their sales team. Cross-referencing the manufacturer’s company name with Linkedin is an easy way to accomplish this.
- Engage with the Sales Team, but leave out all mention of drop-shipping at first: The reality is manufacturers are bombarded with drop-shipping requests every week. Dave suggests intentionally leaving out all mention of drop-shipping at first. Instead, once you’ve developed a relationship with the sales rep, use a phrase like this:
- “..we really want to add your brand to our store, but we want to see what products sells best for your product line… Do you mind if the manufacturer ships direct for the first 90 days, as we test out the new product line…?”
- Sometimes the manufacturer will refuse, if so, ask for the contact details for their 2-3 largest distributors: Then, use this information to repeat step 3.
- Often times, dealing with a distributor can be more advantageous than dealing with the manufacturer because distributors likely deal with multiple brands, giving you an even wider opportunity to add products via a drop-shiping model to your store!
A Drop-Shipping Drawback for Larger Brands
There comes a point in the life of every business where customers take a risk on a new idea because of your brand. You’ve got a lot of existing, loyal customers who will hold anything new to your old standards of quality and care.
One concern with drop-shipping for established businesses is that you’re handing control of your products and customer service over to another company. This will limit your ability to brand an offer and may ultimately cut against your larger marketing efforts if your next product is an extension of an existing line.
Drop-shipping can cause this to get away from you because you’re sourcing and selling from multiple warehouses, which could cause inventory shortages. Plus, you’re no longer sticking to your branding; you’re selling something that any other company can partner with your drop-shipper to sell.
We often hear larger companies pitched about using drop-shipping when they want to expand and test a new market. It is cheaper than creating deals, but you ultimately are trading in name recognition for early, low-margin sales.
Every ecommerce brand knows that good reviews sell. If you look through your highest-rated reviews and find mentions not only of your products, but also your customer service teams and shipping times, drop-shipping may take away what your customers have come to appreciate and expect.
3 Chief Drop-Ship Considerations
So what can you expect when hiring a drop-shipper? Here are a few of the common practices.
1) Predefined Product Selection
Each drop-shipper will give you a list of products that you can sell based on their manufacturing partners. Exclusive are sometimes available, but opportunities tend to be limited.
Drop-shippers should tell you the minimum price you can set for a product (when set by the manufacturer), which will allow you to make some revenue off of each sale.
2) Drop-Ship Fee
There is a standard fee in the industry, which is typically charged on a per-item basis to cover the drop-shipper’s costs for packing and shipping an item. The amount typically ranges from $2 to $5, but can be higher, depending on the type of product.
Fees can be paid as soon as an order is placed, or within a certain time frame set out in your invoice terms.
3) Minimum Monthly Order
Many drop-shippers require a minimum amount on your initial order to weed out the less serious customers. For example, you may encounter a $200 minimum order when your product only costs $50.
This is normal.
You can simply deposit the minimum amount, and it will be a credit in your account.
What to Look for in a Drop-Shipper
When choosing a drop-shipper, here are a few tips to keep in mind.
- If you know which product you want to sell, contact the manufacturer directly and ask for their wholesale distributors. Then, contact the distributors on the list and ask if they drop-ship.
- Look for up-to-date technology such as a thorough online catalog, real-time inventory management, online searchable purchase history, and the like. These will help to enable a seamless experience for you and your customers.
- Ask how they process orders. It’s very convenient to place orders by email. However, some providers are limited to taking orders over the phone or strictly through the website. Depending on your level of order automation, you’ll likely want to find a drop-shipper that can match or enhance your ordering process.
- Good location is important. The distance your drop-shipper is from your customers will affect delivery time and their satisfaction levels.
- Look for good customer support. It is best if you have your own customer service representative assigned to you and any issues you may have.
In summary, drop-shipping is a low-risk technique that is good for breaking into new markets. As you saw in both the examples, it can lead you to the place where it makes sense to invest in bulk purchasing. When that happens, third-party ecommerce fulfillment can help.
When to Partner with a Third-Party Fulfillment Company
Understanding when and how to choose a fulfillment solution partner are critical steps to a successful online business.
Take the story of Craig Rabin, the inventor of The AirHook, who was astonished when his innovative airline cup and electronics holder took off on KickStarter faster than a jet plane.
His $15,000 goal was fully reached in 73 hours, and within 30 days, over $78,000 worth of orders had been placed!
These are great problems to have, but problems nonetheless.
With so many orders placed, the question of how Craig was single-handedly going to fulfill over 4,000 orders to his eager customers became a primary concern.
With the daunting task of over 4,000 orders to be fulfilled, Craig partnered with a fulfillment specialist in the eastern part of the country to complement his location in Seattle, Washington.
“the fulfillment company was a huge help with the massive number of orders placed on KickStarter, but once those orders were fulfilled, I realized that having only one product (in five different colors), along with smaller quantities of orders streaming in after the KickStarter campaign, it was fairly easy for me to handle most of the fulfillment on my own.”
Now Craig leverages his fulfillment partner for other benefits, such as the discounted shipping rates for international shipments, or spikes in order volume.
“My 3PL was able to provide significantly better international shipping rates, so they handle all non-domestic orders, and sometimes international orders if volume spikes,” Craig said.
While AirHook’s surge in KickStarter orders is a great problem to be dealing with, it’s critical for growing and established brands to understand what core competencies are driving their business growth, and to ensure that your company is able to focus on those functions that will continue to “move the needle” for your online store
Having a dependable fulfillment partner, either a supplement to your drop shipping or self-fulfillment operations, or to handle your order fulfillment altogether, is a great way to ensure that your time is spent on those core competencies. Let’s take a closer look at when it’s a good idea to partner with a 3PL and the factors you should consider when choosing one.
- If you are a growing startup that’s finally hit enough buyers to outgrow storing and shipping products out of your mom’s basement (congrats!), it’s a good time to turn to a 3PL.
- If you are an existing small- to mid-size established business (with online revenue in the high seven or low eight figures) and your distribution network is not a core competency, 3PL will also be helpful.
Choosing a 3PL means not having to deal with the major financial and logistical demands that come with fulfillment. Instead of investing in forklifts and other expensive, constantly depreciating equipment, you can focus on growing your marketing exposure.
You won’t need to spend hundreds of thousands of dollars annually on warehouse space, employees that present liability, and expensive software, but can instead focus on existing product design and testing.
A 3PL is a surefire way to loosen up cash flow back into more important functions that increase your revenue in the long run.
How Third-Party Fulfillment Providers Work
Billing from one provider to the next may vary greatly, but they generally will include the following fulfillment operations and billing charges.
The invoice that a third party logistics provider sends you might list a dozen separate charges, but most of them tend to fall into one of three broad categories.
1. Receiving Fees
Receiving fees cover the cost of (drumroll, please) receiving containers full of products that need to be properly inventoried. They can be assessed in a number of ways. You may be charged:
- An hourly labor fee to unload a container
- A flat fee for the task
- By the pallet, box, or even item
If you sell small items like iPhone cover cases, getting charged by the item (even if it’s something piddling like $0.25) might end up being much more expensive than simply paying a flat fee to unload a whole container full of them. You’ll have to do the math and factor in the volume you sell to determine which rate makes the most sense for you.
The other major fee—and this can be a big one—is for storage. Some companies charge by the pallet, while others go by the cubic foot. It’s also good to know that prices can fluctuate throughout the year.
Amazon, for example, is known for charging more for storage in the peak holiday shopping season, between October and January; other e-fulfillment services have followed this demand-based model and have higher prices for storing inventory when there’s less available space in warehouses.
A lot of time goes into finding one particular product in a warehouse that may be the size of 10 football fields (or more), and it still needs to be shuttled over and packed after it’s found. That’s why a common fee charged by 3PL providers is for picking a product off the shelf and running it over to the packing station.
Again, the pricing model itself may vary.
While some companies may charge you a flat per-item fee, others might charge extra if an item is over a certain weight limit or is especially fragile, since heavier or delicate items require extra labor to ensure proper handling.
Once the package has been removed from its shelf in inventory, it goes to the packing stage. Some 3PLs include packing as part of their picking services. Others charge additional fees for basic packing supplies like boxes and padding.
Make sure to ask about what sort of packaging your partner uses.
Envelopes weigh less and take up less space than cardboard boxes, but sacrifice security in the process. Some of your products might involve kitting, such as combining three SKUs into one box.
When that happens, a 3PL might charge you a small fee to cover the extra labor involved. Additional packing-related charges include fulfillment fees, order insert fees, and outbound shipping fees (more on shipping fees below).
5. Shipping Rates
One of the major advantages offered by 3PLs is the discounted rate for shipping, which is passed on to clients.
Chances are your business isn’t moving the same volume of goods as an entire fulfillment warehouse, so it’s beneficial to let a 3PL take control of your operation and pass along those savings to you.
Instead of going directly to UPS or FedEx, letting the 3PL negotiate rates for you can save you a hefty chunk of change, particularly if your volume is not at a level where it’s a negotiating asset for you with the carriers.
3PL’s can also help you secure discounted freight shipments, both from the port to the fulfilment house, better DIM weight factors, and for international shipments.
Once you begin to shop around and compare providers, you’ll find that different providers cater to different needs. For example, check out these niche ecommerce fulfillment services.
6. Niche Fulfillment Services
One of the best ways to identify a successful fulfillment partner is to look for a fulfillment warehouse that specializes in your product type’s niche.
- Do all of your products contain a lithium-ion battery, thus making them fall under a hazmat classification?
- Are you shipping mostly small, lightweight bi-fold wallets?
- Or large electronics?
As you can imagine, the pick, pack, and ship operations for an online store selling t-shirts is going to look and operate very differently than a warehouse picking and shipping boxed furniture. If your products fall under a hazmat classification, it can be especially important to find a fulfillment partner who can ensure that your shipments don’t break any laws.
For example, companies like Printful specialize in on-demand printing and fulfillment of posters, apparel, and accessories.
If you already have your apparel printed and ready to distribute, Whiplash Fulfillment is a perfect match, particularly with their low USPS rates for those lightweight packages.
On the other end of the spectrum, Red Stag Fulfillment specializes in ecommerce stores with an average parcel weight greater than 5 pounds and hazmat products that ship via FedEx or UPS.
By identifying a fulfillment provider that fits your niche, your business can not only save a significant amount of money with tailored shipping discounts, but can also avoid major headaches down the road, and even legal liabilities such as hazmat compliance.
7. Location of Your Fulfillment Partner
Another critical but often overlooked question is choosing the location of your fulfillment center. In order to keep shipping costs down, it’s best to choose a provider that is strategically located near your customers.
This is great for smaller shops with relatively concentrated (geographically) customers, but for larger shops who ship products across the country, your outbound shipping information likely mirrors the general populous of the U.S.
Let’s say you live and operate your ecommerce store from Miami Florida. One of the worst things you can do is limit your search for a drop-shipper, your own warehouse space, or a 3rd party fulfillment partner, to only the Miami, FL area.
Besides having some pretty expensive land, Miami is located in a far corner of the country meaning your parcels are going to take longer, and cost more to reach your customer’s addresses.
If your volume is high enough, another factor to consider is sales tax nexus. Most states add on sales tax based on the destination of the items you ship, but there are a few exceptions
Notably, New Hampshire, Oregon, and Montana don’t levy sales tax on remote sellers (neither does Alaska, but it goes without saying that you probably want to have your logistics HQ somewhere in the lower 48).
Those states offer close proximity to major populations centers on the East Coast, West Coast, and Upper Midwest.
Lastly, on the subject of location, there’s no rule saying that your entire fulfillment operation has to be centered in just one place. If you have about equal demand on both sides of the country or in both the Far East and Europe — it’s sensible to stock your items in multiple locations.
With this understanding of the structure of 3PLs and how they work, here’s some advice on what to look for in potential providers.
Interview Questions for 3PLs
The provider you choose will determine the quality experienced by your customers, which is vital to the success of your business.
Being so, a lengthy interview process should be the norm. Here are 20 questions to ask your potential fulfillment partner during the interview process:
- Removing price from the equation, why does your company stand out from the competition?
- What sort of new technology have you introduced in the last year, and has it enhanced processes?
- How does your employee turnover compare to industry levels, and what do you do to ensure a secure, productive, and safe environment? Do you offer incentives for high performance?
- What sort of plans do you have in place for peak-demand scenarios such as Black Friday or other major product rushes?
- Do you have compliance and KPI reporting that allows us to view shipping in real time?
- How do you deal with freight claims, returns, and other less-than-ideal outcomes?
- If there was a natural disaster, power outage, software hack, or other major disruption, how would your company react?
- How do you coordinate with third party freight companies to manage shipping and account for lost or damage claims?
- Can you provide references from clients with a similar business profile/history?
- How many current customers do you have, how many warehouses (and where are they), and who’s on the executive team?
- Which shipping carriers do you work with? Do you handle international shipping? What are your rates?
- What fees do you charge? What about the “hidden” ones?
- Do you have in-house IT and hardware repair specialists to make sure all software and equipment is running smoothly?
- When is your cut-off time? What about operating hours?
- What sort of value-added services, such as kitting and SKU management, do you offer?
- What software do you use for inventory management purposes, and can you integrate on the back end of my company’s ecommerce platform? (Magento, SquareSpace, Shopify, etc.)
- Do I sign a month-to-month contract or is it long-term?
- How much of the U.S. can you reach within two days via ground shipping? Three days?
- Do you provide email notifications to customers when an item has shipped?
- Can you guarantee that you won’t ever be responsible for delayed, damaged, or lost items?
Download The Questionnaire
If you’d like a thorough questionnaire, here’s a helpful printable resource.
Once you have the answers to these questions, analyze whether the provider looks like a good option. If they do, it would be wise to visit the fulfillment facility and see it for yourself.
Also, it can’t hurt to do a split test. Ask for a 30-day trial period with two, or even three different fulfillment centers so you can compare them head-to-head and decide which one is best for your business.
By following these guidelines, businesses will be able to find a 3PL that helps their business scale up, improve profit margins, and deliver high-quality products to their customers.
While a 3PL is the right solution for many businesses, there are some cases where establishing your own product distribution may be advantageous. Let’s take a closer look at what is involved in this third technique and when it’s a good idea.
When to Establish Your Own Product Distribution
The reality is, your target market may not leave drop-shipping or a third-party fulfillment partnership as viable options.
If your ecommerce store sells high-end, one-off, leather briefcases with custom lining, unique pocket placements, and tailored embroidery, then your business model is simply not suited for sending pallets of your product off to a fulfillment warehouse.
When Kayde Johnson-Anderson first founded LaBu, her goal was to create a successful side business, selling handcrafted jewelry and home goods.
Like many other startups, Kayde set up her fulfillment operation from her home in California in order to have easy access to photographing new products being added to the store and to be able to ensure adequate packaging for her first orders.
While Kayde has recently gone full-time operating and growing the online store, she knows she’s not quite to the point where hiring her first full-time employee to handle the pick, pack, and ship operations is a worthwhile investment.
Black n Bianco, an online store selling children’s formal wear, started out as a retail store in California before launching its BigCommerce shop online.
When sales began to fall for the brick-and-mortar storefront, the Black n Bianco team decided to focus on developing the company’s online presence by expanding to multiple sales channels and marketplaces, including Sears, eBay, and Kmart.
Robert, the company’s web manager, explained that:
“managing the inventory of a brick-and-mortar store, along with the retail store, meant that we had most of the assets (including two full-time employees to handle picking and packing) in place to handle our own fulfillment. That said, using order fulfillment software tools like ChannelAdvisor to manage multi-channel fulfillment and inventory across more than one platform was a critical feature we were missing.
As businesses grow, many companies choose to vertically integrate their operations with a desire to cut costs and maintain a higher level of control over processes. This can be a great business decision for a company, but with a capital-intensive investment such as an in-house fulfillment operation, businesses should wholly evaluate the total cost of such an endeavor.
Understanding which online businesses benefit from a fulfillment partner, versus keeping operations in-house, is a critical evaluation step that should be thoroughly carried out before buying warehouse space. Let’s take a look at some of the issues that could be faced starting your own in-house fulfillment operation.
Understanding the Costs of Self-Fulfillment: Both Financial & Time
For bigger businesses looking to establish their own fulfillment operation (also called “direct order fulfillment”), the sheer number of costs and new liabilities can be overwhelming when setting up your own fulfillment center.
Below, we’ve outlined some of the primary consideration to look into.
Land & Warehouse Space
Rental Rate: $4 to $14 (per sq. ft.)
Besides the base square footage cost, the term length of your lease contract is another primary issue to consider.
Having a physical presence may change your requirement to charge sales tax to your customers. See the BigCommerce guide on ecommerce sales taxes for more information on navigating the spider web of state taxes.
If your ecommerce store is purchasing or leasing warehouse space, chances are you’re looking in your immediate area. Check back to our earlier section, Location of Your Fulfillment Partner, for a guide on how to evaluate the best location for your product distribution.
It’s also fairly unlikely that you’ll have multiple warehouses of your own, at least at first. If you’re located on one of the coasts or one extreme corner of the country, you need to weight the increased cost of shipping your orders to customers further away, as well as the extended time it may take for your customers to receive an order. Ask yourself, “How valuable is being able to reach all of my customers in two days?”
Operational Capital Expenditures
- Pallet Racking: $50 to $80 per pallet position (not including installation)
- Forklifts: $800 to $1,100 per Month
- Trailer loading docks: $250,000 per Dock
- Conveyors: Belted ($150 to $200 per foot), Gravity ($50 to $120 per foot.)
- Computers/Tablets/Phones: (for integration with new warehouse management software) $1,000+
Figuring out what software tools are needed to plug in with your BigCommerce store and manage with warehouse operations can be a daunting task.
Platforms such as ShipHero can be a lifesaver versus the time and expense of trying to create your own software program. Furthermore, software solutions such as Skubana and ShipStation are a great if you need to consolidate orders from multiple storefronts or marketplaces, or sync availability with a drop-shipper or third-party fulfillment partner.
Other apps, such as AfterShip, can be a lifesaver by passing all parcel tracking information along to your customers.
The necessary software solutions exist in the BigCommerce App store. Sure, there’s usually a monthly or per-order cost associated with each one, but the real cost to consider is the day-to-day managing of integrations between multiple apps, your storefront, and your customers, which in itself can create a need for a new full-time tech guru at your company.
How easy will it be for you to hire and train (plus training materials and SOP documentation) a workforce to run your warehouse? You may only need two or three additional people, but depending on the size of your existing workforce, an increase in headcount could have other implications on your business.
If you’re going to be hiring new people, you need to have a plan in place to deal with seasonality, particularly around the holidays.
Shipping Rate Discounts with Carriers
Negotiating your own shipping discounts can be a hard mountain to climb, but once established, these discounts can serve as a competitive advantage and even an additional profit center for your business.
The primary factor when weighing your negotiating power is your monthly order volume
The more you ship, the more negotiating power you’ll have with carriers. A secondary factor is the weight distribution of your volume.
If the majority of your outbound parcels are within a 5-pound weight bracket, this concentration of volume can help you earn the best discounts where it will save you the most money. Keep in mind that thanks to the ongoing changes to dimensional weight, your 3-pound container of protein may actually end up being billed at 7 or 8 pounds.
On the other hand, for businesses who have low volume, or whose volume is spread thin across the weight tables, a profitable ecommerce shipping strategy may be hard to establish.
Changes to Core Competency
The biggest question to ask is,
“Will setting up my own fulfillment operation give me a unique competitive advantage?”
Going back to Craig Rabin’s example with the launch of The AirHook, when your ecommerce store hits it big and sees a massive uptick in orders, it’s critical that you take advantage of this positive trend and fulfill orders in such a way that your customers’ expectations are exceeded (or, at a minimum, met), in order to ensure a continued relationship with these customers.
Often, this means offering free two-day shipping, with orders shipped on the same day, 100% perfectly picked orders, and fast return processing.
For most ecommerce stores, these areas of focus are outside the core competencies that created the growth in order volume in the first place. Since The AirHook only sells a single product in a handful of different colors, Craig is able to manage the month-to-month domestic order fulfillment following the KickStarter surge.
But for ecommerce stores with hundreds or even thousands of SKUs, a valuable third-party fulfillment provider is a critical partnership to have to ensure that your time is spent handling the primary drivers of your business, such as growing your online traffic, or carrying out innovative new marketing tactics.
Now that you understand the three main options for ecommerce fulfillment — including when to use them and how to get started — you’re ready to take a look at your business and decide which is the best fit.
The first step is to understand what your goals are if you’re evaluating a new fulfillment technique.
- Are you looking to improve your warehouse/pick, pack, ship efficiency?
- Are you looking to save on shipping cost?
- Are you looking to expand your product offerings?
Also, understand what stage your business is in, and where you hope a new order fulfillment model will help to evolve.
- Are you a startup on a lean budget looking to start making sales? Or an established business that wants to test out a new market?
- Is your goal to grow your business over the next 5 years and then sell the company? Or are you long-term focused and looking to find a fulfilment partner that can enable your company to grow for decades?
- For medium-sized businesses that already have demand for their products or services and have the capital to invest in inventory, 3PLs are a great fit. You can outsource all of the hassle to experts, increase your profit margins, and focus on the parts of your business that will impact your bottom line the most.
- Lastly, if your online store specializes in high-end speciality items, self-fulfillment is often the way to go. Just understand all that’s involved from a time and capital perspective before committing to this model.
The right solution for you is going to depend on what type of product or services you are selling and where your business is in its development.
Keep this guide on hand to refer back to and identify the right technique based on your unique situation. If you have any questions, send them over in the comments section below.
Order fulfillment is a truly integrated part of your supply chain that all other business aspects depend on, so choose wisely!
Want more insights like this?
We’re on a mission to provide businesses like yours marketing and sales tips, tricks and industry leading knowledge to build the next house-hold name brand. Don’t miss a post. Sign up for our weekly newsletter.
Less Development. More Marketing.
Let us future-proof your backend. You focus on building your brand.