1 - This article was written to give online retailers everything they need to evaluate and make a decision regarding outsourcing the order fulfillment of their customer orders.
Making the decision to outsource is an important one for any online business. The benefits and risks are great so the better you are prepared going into the process, the better the result will be.
2 - To Outsource or Not?
Any fulfillment company’s website is bound to offer you a free downloadable whitepaper on the “Top 10 Reasons to Outsource Your Order Fulfillment” – so I will spare you the top 10 list here.
That said there are many legitimate reasons to outsource – the most common being that in all likelihood a quality 3rd party can do it cheaper than you on a per order basis. If you can avoid the headaches of staffing and running a fulfillment operation you should. Doing fulfillment well is all about processes, systems, and scale – three things a business built to do nothing but fulfillment ought to be able to do better than a small or medium size online retail business can.
The first step in evaluating the options for outsourcing should start with getting a handle on the costs of doing the work in-house. Rent, labor, supplies, systems and other overhead costs, the aggravation, etc. are “costs” you should be weighing. From that, the soft benefits of faster turnaround time on orders or lower negotiated costs for shipping and materials should also be considered. Before jumping to the conclusion however, we’ll review what happens during the order fulfillment process, the costs, and what to consider when evaluating 3rd party fulfillment centers.
3 - What to Look for When Outsourcing Your Order Fulfillment
This is another fertile topic for whitepapers, but it comes down to common sense. Here are 4 questions you should get answered from a third party fulfillment company right away:
- The #1 Question is of course - based on their rates, will working with them reduce your costs? (remember to include the soft costs or time and aggravation)
- Does the company have experience with products similar to mine?
- Do their references check out?
- Do you feel their reporting capabilities and account support staff are adequate?
Far and away the biggest issue I see when a company decides to outsource order fulfillment when they have done it themselves in the past is getting that the fulfillment centers are built to handle lots of products for lots of customers. This means that just because you know when an item is ordered and sku#123 is out of stock that sku#234 can be shipped instead does not mean that the fulfillment center will know to do that. In fact, any work around or manual steps an online retailer pushes a fulfillment center to implement WILL create an issue at some point down the road. So, when you outsource, understand and accept that the fulfillment center cannot and will never know your products as well you. For the process to work you need to help them work within their processes. They are pros at it and will do a good job – don’t get in their way (unless they are really messing up, which can happen too…).
4 - Startup? When to Outsource
A big decision for any start up business, whether it is related to order fulfillment or any other function, is deciding when to stop doing something yourself and to outsource.
A general rule of thumb for online retail start ups is to look to outsource when order volume reaches 15-20 orders per day. To be frank, it will be tough to get a fulfillment company to take you seriously as a startup so it is good to have some sales history or at least a solid business and go to market plan. The reason is fulfillment companies make their money on having a high volume of orders, and not by billing for storage. Most fulfillment companies will actually discourage customers from keeping “dead” storage in their warehouse because they want inventory spaces that turn over and generate more revenue that just $10-15 for storage per month.
The other thing fulfillment centers know is that start ups take as much if not more time to implement and service than established online retailers. That coupled with low order volume make starts ups not appealing to most fulfillment companies. That’s why I recommend coming armed with your business plan to get taken seriously. Every fulfillment company has experience with countless new businesses that plan to be big but that seldom actually happens quickly.
5 - How to Compare Pricing
One of the challenges of evaluating the options for outsourcing your order fulfillment is making a true apples to apples comparison of rates from multiple fulfillment companies. Each company will likely present pricing in a way that represents how they prefer to bill for services and it will also likely be unlike any other quotes you have received. In the end, typically the best way to deal with that is to work the various rates and charges into a per order cost.
When it comes down to it, order fulfillment costs are a function of labor, rent, and systems. At a high level, there are 3 general areas of cost involved with outsourcing order fulfillment.
- Order Fulfillment Labor: the time and cost involved in picking and packing the items on an order, as well as related receiving and administrative time spent on services your program
- Storage: the amount of space your products take up in the fulfillment center
- Materials: the cartons and other packaging material used to prepare an order for shipment
Some fulfillment companies will charge based on a cost as a percentage of sales, but most charge through a combination of per order costs plus storage and other variable costs for things like receiving, account management, cycling counting, etc.
A VERY general rule of thumb an online retailer could use would be to figure order fulfillment costs will run 3-5% of sales, with shipping costing an additional 5-7%.
To start the process of outsourcing, you should get quotes from multiple fulfillment vendors.
6 - Fulfillment Center Location
The closer your fulfillment center is to your customers the better. Clearly your shipping costs and delivery times will be minimized if this is the case. In theory then, why not store and ship product from points all over the country? The problem is maintaining duplicate or triplicate inventory is very expensive, so the real answer to whether or not it makes sense to operate out of multiple fulfillment locations is as much of a function of how many products you stock and the volume of orders you ship.
There are lots of studies on this available in supply chain magazines, but for a normal national distribution of orders here are 3 scenarios that describe the optimal network of shipping points.
For 1 location – Mid-Atlantic is the optimal location for a national program
For 2 locations – Mid-Atlantic and West (Reno, NV)
For 3 locations – Mid Atlantic, Memphis or Chicago, and West
Many fulfillment centers operate out of multiple locations and can provide a network to give you a presence around the country. It will really depend on the characteristics of your program to determine if it makes sense.
7 - Shipping Options for Online Retailers
There actually may be more carrier options for shipping your customer orders than you realize. The good news is many options can lower shipping costs without sacrificing on service. The only bad news is it can be a little messy doing the analysis to figure out the options and make a true assessment to come up with the optimal service/ cost balance.
Of course, the main players are FedEx, UPS, and the Post Office. Each of those carriers have several service options that, although they have different names, are generally all variations on the same service levels – Next Day, 2nd Day, Ground, etc.
A common question that does not have a simple answer is “What the cheapest way to ship my customer orders.” Given the options and complexity of how rates are calculated that is complicated. HOWEVER – here are some very general generalizations that are at least a starting point for an analysis you’d want to go through.
- If you are less concerned about trackability and super reliable service, the USPS will likely be your best option for residential deliveries at lower weights. If you have 3-4 lbs or less size shipments are often less the UPS/ FedEx Ground. This is especially true for under a lb. shipments.
- People tend to remember their bad experiences, but FedEx and UPS largely offer the EXACT same service. They are both incredibly well run companies, even when their customer service may be horrible some times. The quality of your local service center can also affect your particular experience with either carrier, but the reality is it makes sense to go with the carrier who gives you the best price. It’s time to let go of the package that you remember UPS losing back in 2001. It was over 10 years ago and it was 1 of 1000’s you’ve sent. Besides, you may have “mis-remembered” and it was really FedEx.
If you decide to outsource order fulfillment your options may be a little more limited. Fulfillment centers will likely have a preferred carrier that you may or may not be required to use for shipping your packages. This typically means that they have better rates with one carrier and happen to favor the local UPS sales rep over the local FedEx sale rep, or vice versa. Most facilities however will allow you to ship on your own account whether it is UPS or FedEx, and in all likelihood have pickups and deliveries from both carriers every day, in addition of course to the USPS. If a fulfillment center requires you to use a certain carrier it likely is an indication they are making a margin on your shipping volume. Which, if it is a net savings to you then its not really a problem. Just like the costs for packing orders or storage or anything else, the costs of outsourcing order fulfillment need to be looked at in aggregate. See How to Compare Pricing above…
Adding complexity to shipping rates are the many surcharges that carriers will charge: Fuel Surcharges, Residential Delivery Surcharge, Extended Area Surcharge, HazMat Charges… it goes on and on. Make sure you know what you are shipping and any potential accessorial costs that you might incur.
A new trend in online retail is also shipping services like Amazon Prime and Shoprunner. With these services you basically pay a flat amount per year and you are able to get free or low cost upgraded shipping when you buy off of certain websites. The trend is creating a lot of pressure on online retailers to offer low cost or free shipping to be able to complete with the likes of Amazon.
8 - State Sales Tax
This is a complex issue that may take years from now to get straightened out. As it stands every state has its own laws on whether or not to collect sales tax.
Another consideration for an online retailer looking to outsource their order fulfillment is to make sure using a 3rd party for order fulfillment does not create nexus. I am NOT a tax attorney but this relates to whether or not you’d need to pay taxes in the state where your fulfillment is managed. Amazon is taking on this fight with a vengeance as I type so the best thing to do at this point is to make sure you understand the tax rules in the state(s) you operate in currently, and see how things shake out because the situation is very fluid right now.
My opinion is that this issue will have a greater impact on small and medium size online retailers than is understood. This is an issue you should be paying close attention to if you are an online retailer in any state.
9 - Shopping Cart Integration
A vital part of any order fulfillment process is getting the order data from your online store and shopping cart program to your pick pack area so your operations team can accurately assemble orders– whether you outsource fulfillment or not.
There are A LOT of ecommerce platforms out there, way too many to list here. But, it seems apparent that several have started to separate themselves from the masses over the last year or so. I will leave it to you to pick the best but gone are the days when a company needs to build a proprietary ecommerce platform on its own. Between Magento, Shopify, Volusion, or 3DCart you should be able to find a suitable, scalable shopping cart program for your online store.
When it comes to integrating the shopping cart program with a 3rd party fulfillment center, most established ecommerce order fulfillment operations will have pre-built integrations that make connecting your cart to their systems pretty seamless.
10 - Inventory Management
Perhaps the most important part of outsourcing any fulfillment operation is getting the Initial Move done correctly. When the products are brought into the fulfillment warehouse for the first time it is obviously very important that the products are identified and put into inventory accurately. I can promise that if you are having a large number of inventory discrepancies during your initial roll out, then those will be greatly magnified down the road. Make sure the initial inventory transfer is done right no matter how long it takes.
Once a program is up and running obviously there will be additional inventory added regularly – see the next section on Receiving.
In terms of ongoing inventory management there are a few things you should expect.
1- 97% to 98% inventory accuracy (on total piece count in inventory) is normal and most fulfillment centers will guarantee a certain level of accuracy.
2- Physical Counts/ Cycle Counts done on an agreed upon schedule and with certain guidelines. A cycle count is a physical count done on certain items in inventory, typically the most active SKU’s.
3- The ability of your fulfillment center to send you low inventory alerts for each SKU, so if item #123 gets below 5 items in stock you will be notified and can order more product.
Many fulfillment operations will utilize bar code scanning to facilitate product inbounding, as well as order picking. Pick to light and pick to sound processes are additional ways technology is used to minimum human error in the order fulfillment process.
11 - Sending Product to a Fulfillment Center
If you have outsourced order fulfillment then you are likely leaving the responsibility for making sure the products you are getting from your suppliers are the right quantity and in good condition. The receiving department in a sense becomes your eyes and ears to make sure your suppliers are producing and delivering what you expect.
Most warehousing and fulfillment facilities will have some type of ASN (Advanced Shipment Notification) process that help give their receiving department a heads up that your product is on the way. The better you can prep the receiving team at your fulfillment center about incoming product the faster it will get received into inventory, and the more accurate they will be with their inventory counts. Discrepancies will also be identified sooner, which will lead to faster notification to you.
It’s normal for a facility to commit to do a visual inspection for damages and then a physical count on 10 to 15% of the items to verify the quantity. In circumstances when a carton comes in and contains only 1 SKU, receiving will likely use the quantity marked on the outside of the box as validation of the count. When a carton contains mixed SKU’s, it would be expected that the each piece would be counted in the box for each SKU.
Fees for how the cost of receiving is covered can vary depending on the fulfillment center. Some companies may cover the cost of receiving as a per SKU fee, or as part of a program management fee, but most will charge for receiving time as a per hour charge. The reason this method is most common is because the timer required to do receiving depends on a lot of factors not under the control of the fulfillment center. That said, in certain circumstances, a per pallet or per carton charge may used when the product mix is limited or very consistent.
12 - Packaging
One of the immediate advantages of working with a 3rd party fulfillment operation is the likelihood that they’ll be able buy cartons and packing material less expensively than you could on your own (this applies to shipping costs as well). One of the downside of outsourcing however is the lost sense of control over the customer experience and how you products will look when they show up at your customer’s doorstep. Forgetting for a moment the UPS or FedEx package handler crushing your box and its contents to make a little more room on a truck (I’ve had employees tell me they do it!)., how your product shows up shapes your customer’s perception of your business.
13 - SKU Counts
SKU Counts refers to the number of unique SKU’s an online retailers maintains in inventory. Having a large number of SKU’s obviously make order fulfillment, and inventory management more complicated. Many 3rd party fulfillment centers will charge a monthly per SKU fee based on how many unique SKU’s you keep in inventory. Others will factor the SKU count into their per order costs. In either event, having a lot of SKU’s will increase the complexity of your fulfillment program.
This might come as a surprise but most order fulfillment companies are not interested in getting you to store as much product as possible at their facility. Of course they’ll take and bill at a rate to make a small margin, but the goal of a fulfillment operation is to being in customers that ship a lot of orders, and as a result turn over a lot of inventory. Dead storage is bad, high order volume is good for an ORDER FULFILLMENT CENTER. There are plenty of public warehouses for storing products that will never sell.
Okay, now that we are clear on that, there are a few different ways a fulfillment center will charge for storage. A cost per pallet is common – a standard pallet is generally defined as having dimensions of 4’ x 4’ and 4’ tall, which equals 64 cubic feet. Per square foot, per shelf, and per cubic foot as also possible. In the end, each unit of measure is attempting to quantity the amount of space you product is using in a facility. You are simply paying rent on that space.
14 - Inbound Freight
One over looked area to save money for online retailers is to do a better job managing the inbound movement of their products to their fulfillment operation. A big percentage of online retailers do not have the relationships or volume contracts with shipping companies that the fulfillment warehouse likely has. Whether it is bringing in a container of product from China or shipping a pallet of product across the country to a retailer’s distribution center, it is worth seeing if your fulfillment center can get you a better rate.
15 - Call Center Services
There are really two schools of thought on fulfillment centers offering call center services. It’s my experience that running an order fulfillment operation and a call center operation are two very different animals. The skill set of employees to be good on the phone and run an efficient warehouse are not similar at all, nor is the technology. I understand the appeal to an online retailer to have the functions as closely tied together as possible, but the ease in which systems can be integrated and accessed remotely there is no reason the two functions need to be in the same building. That said, some fulfillment companies do both well, but I would just not make it a deal breaker either way if this is concern for you when evaluating possible vendors.
16 - Fulfillment Process
So what exactly happens during the fulfillment process, from the moment an order is released to the floor of a fulfillment operation?
Let me back up and explain “released” first… Just sending an order to the fulfillment center doesn’t mean its going to ship. The fulfillment center’s warehouse management system (WMS) will check each item on the order to make sure the items are in stock, and once that is confirmed the orders will be released to the pick pack operation to be fulfilled.
The first step is a pick ticket is printed out. An employee in the fulfillment center, the “picker”, will take the printed pick ticket and locate the item(s) on the ticket and place them in a bin or carton. That seems simple enough, right? Order fulfillment is just picking an order. Well that is the easy part, but the challenge is that 100 other things have to happen just right to allow the picker to do their job right. It’s the receiving and inventory management and systems and lots of other things that happen leading up to the moment the picker walks up to the shelf location and find the right SKU in the right place in the right quantity. It can be a beautiful thing (to some people anyway).
Then, in most instances, another person will perform at least one quality control (QC) check to make sure the right items were selected.
Before the box of picked items is sealed up, a packing list is added to the contents. The packing list is intended to document the contents of the box for the recipient. Some 3rd party facilities may use the pick ticket ticket as the packing list and include it in the shipment. Others may print a separate “packing slip” to go in the shipping carton. In either event most fulfillment providers will allow some level of customization to the packing list such as allowing you to add your logo to the document and maybe some language on returns or product instructions.
The sealed boxes will then likely move through the facilities shipping station/ logistics software where the shipping label is printed and applied to the carton (check out the Shipping section for more info on that).
With a 3rd party fulfillment operation, the fees for packing orders typically can be structured in a few ways. Many facilities will charge a flat per order amount, which may include an additional per piece fee – this seems to be the most common method. Other companies charge a per box fee (which is different than per order), while others even charge as a percentage of sales.
Here is a chart that details the general areas of cost and method in which a fulfillment company will potentially bill for.
First published here: Outsourcing Ecommerce Order Fulfillment for Online Shippers