Also, here is a link to another post that talks about how a 3rd party order fulfillment operation handles returns.
Taking the step to outsource order fulfillment clearly comes with some benefits, but also comes with some risks.
What’s the upside?
With proper execution a company can:
Speed time-to-market: Fulfillment centers are built for efficiency and speed. A strategically located fulfillment center can give a business better access to local markets, improving the time from when an order is placed and the order is delivered to the customer. Leveraging the advantages of the right distribution points is a key factor in how many online retailers are able to offer “free shipping”.
Lower operating costs: Outsourcing order fulfillment can reduce a company’s operating costs by taking what is presently a fixed expense (warehouse space and labor) and making it a variable expense that adjusts with the actual order activity levels. If a business is paying year round for a warehouse space that is large enough to accommodate its busiest time of the year, then there is likely a lot of unused space that is being paid for during the non-peak periods. Working with a 3rd party warehouse can also potentially help improve buying power when it comes to carton and shipping costs (the 2nd key point in how online retailers are able to offer free shipping!).
Of course, in the end the goal of any business is to increase customer satisfaction and retention.
What’s the downside?
Whether the order fulfillment process is managed in-house, or is outsourced, failure to execute can have serious negative effects. Clearly a failure to deliver orders accurately and in a timely way can erode customer confidence and in the end lead to customer and market share loss.
In the online retail business it takes a lot of effort and cost to attract and convert paying customers. The order fulfillment and delivery process will likely have the greatest impact on a customer’s perception of their experience with a company.
Interesting information from comScore via TechCrunch.
A question we get a lot from clients is “How can so many online retailers offer free shipping?“, which is then followed up with “What can we do to compete with free shipping offers?”
There are a couple of reasons online retailers are able to offer free or cheap shipping, unfortunately the reality is that there are no free shipping service options with Fed Ex or UPS or the Post Office or anyone else. So whether you are a large shipper, ecommerce startup, or growing online retailer there is no such thing as free shipping.
What large companies do get, that startups and small companies typically do not, are substantial discounts on small package company’s published rates. In addition, if a company is shipping a very large amount of the same size packages there is often the chance to get preferential rates in those circumstances.
Clearly if you are a startup or small online retailer you are at a significant disadvantage because you are without the leverage to negotiate better rates with FedEx or UPS. But in the end, just like your business, the big online retailers are covering the cost of shipping with the margins in their products.
What to do about it as a startup or small online retailer? Obviously it is paramount to figure out ways to minimize shipping expenses because these are costs that are not going away no matter how big you get.
Consider alternatives to FedEx or UPS by looking at the options offered by the USPS. Many companies find that Flat Rate Priority Mail boxes are a good way to reduce costs. FedEx and UPS charge hefty residential, extended delivery area and fuel surcharges that hurt the economics of shipping Business to Consumer (B2C) with them.
More distance equals more cost so your shipping location is directly correlated to your shipping costs. Most of the people in the US are located in the mid-atlantic and northeast part of the country. If you are shipping from San Francisco to customers in New York, the cost could be double or more than the cost to ship to New York from a location in Pennsylvania. Another advantage the big guys have is the ability (as in volume) to ship from multiple points within the US. They can service most of the country with cheaper ZONE 2 or 3 shipments, as opposed to expensive ZONE 8 shipments going coast to coast by having multiple warehouse locations to ship from. Similar story, but it does take volume to make it worthwhile to set up multiple shipping points around the country.
Many 3rd party order fulfillment warehouses will pass on their volume discounts with FedEx and UPS, so look into a partnership to outsource your product shipping. Your operation will potentially benefit from the collective volume of all the customers shipping from that fulfillment center.
Ken Kowal is the Director of New Business Development for 3rd party fulfillment warehouse Landis Logistics and ecommerce order fulfillment service FillShip.com. Follow Landis on Twitter @landislogistics. If you would like to talk about way we can help save your online retail business on shipping costs get in touch at firstname.lastname@example.org.
Here is a brief case study detailing a new client we are proud to now be serving at Landis Logistics.
Based on Long Island in NY, the client sells commercial fishing supplies to fishing vessels that are catching Swordfish and Tuna by using long-lines. Their business is built to supply boats that are typically out to sea for 2 to 3 weeks at a time, so there is always a flury of activity to stock up on supplies when the boats are back in port and then heading back out to sea again a few days later. Their customers are located all along the east coast and the Caribbean.
The client’s business has grown significantly over the last several years and at the beginning of the 2011 they decided to look at options for outsourcing their order fulfillment, which they had been doing themselves from a store in New York. The typical orders from their clients will ship via a small parcel shipping company or sometimes LTL, depending on size. Their line of products includes anything a fishing vessel would need – apparel, boots, knives, line, hooks, and plenty of other accessories (400+ sku’s in all).
Freed up to spend more time growing the business now that they have outsourced their order fulfillment, the client is now developing a new ecommerce online retail store and expanding their line of products. Plus, the customer is no longer reliant on expensive onsite warehouse space to store their inventory.
Two websites you may want to check out if you have questions on shipping and fulfillment are Quora and Focus. Both give you the chance to post questions and get answers from industry “experts” that will hopefully be helpful. Here is a link to an example of a question from Quora.
If you are a manufacturer, or any business that has a need to warehouse and storage products then you may have considered outsourcing as an alternative to keeping the product in your own building. So, what are the costs that go into using a 3rd party warehouse for this service that you should be aware of.
Storage Costs (of course), which are typically charged by the month and on a per pallet or square foot basis.
In/ Out Charges are the handling charges for physically unloading the product off the trucks and putting them away in the warehouse, and then loading them on trucks again when they leave the facility.
Paperwork Fees are the cost for preparing shipping paperwork like the Bill of Lading Form.
Pallet Preparation Fees can include the cost of adding shrink wrap, re-palletizing boxes, or other labor costs involved in getting pallets ready to ship out of the warehouse.
Ken Kowal is Director of New Business Development for Landis Logistics and FillShip.com, serving online retailers and manufacturers with order fulfillment and warehousing services in the PA, NJ, and NY area.
One decision every growing manufacturer and distributor probably needs to make at some point is deciding when it makes sense to add additional warehouse space in other locations.
For instance, we often talk to food manufacturers and co-packers located in California or other places on the west coast interested in setting up an east coast order fulfillment warehouse that will put a distribution point closer to the large populations centers in the east. The reason is there are economies to be gained with transportation costs, as well as improved time to market by storing and shipping from a point closer to your customers.
As an example, if a food manufacturer in CA is shipping small partial truckload shipments (less than truckload, or LTL) to many customers in the Philadelphia, PA area it is typically more expensive than shipping full truckloads (TL) to a distribution point closer to the end customer (say in eastern Pennsylvania) and delivered from there.
When a business’s volume of small, LTL shipments to a certain geographic area become enough to fill a whole truckload is really the point at which the business should consider looking at options for drop shipping. At this level of activity, many trucking companies or logistics providers can offer solutions to create efficiencies with turning LTL into TL shipments. When the volume gets to the point of many trucks to the same region, then it is time to look at options for finding additional warehouse space (either owned or 3rd party) in the areas where your customers are.
The math is pretty straightforward: add up the cost of the individual LTL shipment and compare that to the cost of shipping full truckloads to a central location, and then shipping out to their final destinations. The break even point at which using a regional, 3rd party warehouse may come sooner than a business realizes is possible.
A great way to drive efficiencies within an order fulfillment operation is to, of course, be more efficient with the packing process.
One great opportunity to do that is if you have a certain number of unique sku’s that typically ship alone, and at a high volume. Instead of waiting for each customer order to come in for a product that will likely be shipping by itself, utilize some down time to pre-package the products in its shipping container so that when the customer orders do come in it is simply a matter of printing and applying the shipping label to the package.