Ecommerce: Should You Outsource Your Order Fulfillment?
In ecommerce, there can come a point when you face the question of whether doing order fulfillment in-house is bogging the business down and preventing growth. Outsourcing this function to a 3PL (third-party logistics) provider can free up time and other resources that allow you to concentrate on increasing revenue and moving the business forward.
So, let’s take a look at what exactly a 3PL fulfillment provider does and how to determine if outsourcing this function would be the right decision for your business.
What is outsourced order fulfillment?
Think of outsourcing order fulfillment as delegating. Essentially, you’re hiring experts to do the tasks that aren’t within your core competencies. By delegating the packing and shipping of orders, you free up yourself and your team to concentrate on the activities that require your expertise, knowledge, and higher level thinking. These can include product selection, sourcing, design, sales, marketing, and of course the planning and strategizing needed to move the company toward Big Picture goals.
How does it work?
There are two basic parts to outsourced order fulfillment:
- The fulfillment service provider warehouses your goods.
- The provider fulfills orders on your behalf:
- The fulfillment provider integrates their software with your ecommerce store;
- When an order comes in, the provider picks, packs, and prepares the product for shipment;
- The provider coordinates and schedules shipment pickups with carriers such as FedEx, UPS, and the USPS.
The pricing also has two parts. To warehouse your goods, fulfillment providers typically charge a flat monthly storage fee that’s determined by the number of bins/pallets you warehouse in their facility. Then, there are additional per-order fees to cover picking, packing, and shipping.
Benefits and disadvantages of outsourced order fulfillment
As with everything, there are benefits and disadvantages to delegating your order fulfillment to a third-party provider. Here’s a look at the main pros and cons.
- Cost reduction — This comes mostly in the form of labor cost savings. Order picking, packing, and preparation is a time-consuming process that is likely not making the best use of your team’s abilities. There can also be savings on the actual shipping costs, because 3PL fulfillment providers typically have close relationships and well-negotiated agreements with the major parcel carriers.
- Scalability without fixed costs — Your business can grow without your having to worry about logistical aspects such as warehouse space and process efficiency or negotiating new shipping agreements. You also don’t need to worry about fluctuations in order volume — the fulfillment provider can scale up or down as you need and your costs increase or decrease accordingly.
- Shipping expertise — As mentioned above, thanks to the volume they handle, fulfillment providers are usually able to get better rates with the carriers than you could. They also typically have strong relationships with the carriers and understand all the tricks of the trade.
- You can enhance your service proposition — Do you want to offer same-day or two-day shipping? That’s likely to be much easier to do when working with a fulfillment provider, in terms of both process and cost.
- Someone else handles inventory and returns — The provider will audit the inventory in their warehouse and integrate the data with your ecommerce inventory management tools. Your fulfillment partner will also provide support for your customers and manage the time-consuming task of processing returns.
- Better utilization of your time — You and your team can focus on tasks that require your strengths, such as marketing, sales, product selection and design, and other key business tasks that require higher-level thinking.
- Loss of control — The whole of the order fulfillment process is out of your hands.
- Inability to personalize — When you outsource packing, you can potentially lose out on the marketing and customer service component of creating a Wow experience when the customer opens the package.
- Potential increase in mistakes and returns — Although they will typically have strong processes and checks in place because fulfillment is all they do, fulfillment providers will still make mistakes. There can also be greater potential for breakage and other damage.
- Potential reduction in customer service — Because you’re handling neither the packing and shipping nor the returns, you are ceding control over those two important customer touchpoints. A fulfillment provider is not going to have the loyalty to your brand that your employees do.
- Potential hit to brand loyalty — This stems from all of the previous factors. Anything that goes wrong in the first four categories will detrimentally affect customer satisfaction and brand loyalty.
- It can be costly — If your products move well, then you are likely to save money by working with a 3PL for order fulfillment. But if your products sit on the shelves, the storage space charges can become prohibitive.
Does it make sense for you to outsource fulfillment?
This decision is entirely dependent on elements specific to your business and operations, both tangible and intangible. Here are some key factors to consider:
- Your in-house operations can’t keep up with the pace of your order volume.
- The cost of order and warehouse management technology is becoming prohibitive.
- The cost of warehouse space is too high and impacting margins.
- Spikes in order volume are negatively affecting your customer service.
- Order fulfillment is sucking all the time out of your team’s day and other important business areas are suffering.
- Compliance and reporting paperwork and requirements have become cumbersome.
Asking these questions will help clarify the decision:
- Would the cost of using a 3PL be less than the internal cost?
- What is the opportunity cost of doing fulfillment in-house?
- Which parts of the order fulfillment process would it make most sense to outsource?
- Which parts would it be best to keep in-house?
- What would be the time savings?
- What would be the cost savings or increase?
- What would be the net benefit?
After you do this analysis, you might find that partnering with a fulfillment provider is not the right decision now, but it could be in six months or a year or two. Determine the tipping points (e.g., an order volume threshold) and note them so you can monitor when those thresholds are crossed. Then, you can take another look at outsourcing order fulfillment.
How to select a fulfillment partner
The right fulfillment partner for your business will depend on your specific needs, but there are some important elements to take into consideration.
- What are your needs in terms of warehouse space and services — warehousing (volume and location), order placement (email, phone, API), courier collection (daily, hourly), order volume?
- Do they offer bulk discounts and/or other cost-saving options?
- Do they have the capacity to scale if your business suddenly takes off or if you get a sudden flood of orders?
- Do they have a focus on customer service and a reputation for customer satisfaction?
- Will they accept and fulfill urgent orders that come in after the cutoff time?
- If you import or export goods, can they handle the customs and clearance requirements?
- What percentage of orders that they fulfill suffer breakage or damage?
- What percentage of orders are shipped incorrectly (wrong address, wrong service level, wrong product or amount of the product)?
- How long have they been in business?
- How big are they and what geographical locations do they serve?
- Where do they have warehouses and distribution centers — in relation to where your customers are?
- What is the cost per order and per volume of warehouse space in relation to your specific needs?
Once you’ve looked at all the measureable factors and have a shortlist of potential 3PL providers, carefully consider each vendor’s experience, capabilities, and integrity. Ultimately, you want your fulfillment partner to be a good fit for your organization, especially if you will be trusting them with the final touchpoint with your customers.
Analyze and periodically reassess
Track the metrics that you determined were the key benefits of outsourcing your order fulfillment. What quantifiable (and qualifiable) benefits are you gaining from freeing up that time? Is your business leaping forward because you now have the bandwidth to concentrate on marketing, sales, and strategizing? Have your per-package shipping costs decreased? Can you quantify the cost of ceding control over branding and customer service? Are the costs less than the gains?
Track these elements over time and periodically reassess. But don’t be too hasty to say it’s not working if at the end of three months the numbers and other results aren’t great or what you expected. It can take time for the full benefit of any major change to make itself known.
In any business, it’s important to streamline every process you can. For ecommerce companies, delegating order fulfillment to a 3PL can be the streamlining needed to propel business growth.