Fulfillment constitutes a major cost for an online retailer. As a growing business or one still in the stages of planning, a strategy for cost-effective fulfillment should be your priority.
Third party fulfillment offers eCommerce businesses the opportunity to pay another company to handle the nitty-gritty of fulfillment. With the right capital and shipping strategies, this can be a huge asset to an emerging retailer.
Read on to learn all about third-party fulfillment, including what it is, how a business can benefit from it, and the possible alternatives for businesses that should seek another strategy.
Define Third-Party Fulfillment
Fulfillment refers to all processes required to fulfill a customer’s order. These include receiving, processing, cataloging, and shipping your products. Fulfillment constitutes a major expense for an eCommerce business, so outsourcing that process to a third-party company has its advantages.
In third-party fulfillment, another company deals with the process of storing, sorting, packing, processing, and shipping your customers’ orders. This means that you must buy your products in bulk from the manufacturer so that those listed on your store are always in stock in the fulfillment warehouse. You do not, however, need to buy and manage your own warehouse. The fulfillment company does that for you.
On a third-party fulfillment system, your listings online represent products that are already in storage at the fulfillment company’s warehouse. This is so that the buying process remains streamlined for cost-effectiveness. You purchase the products in bulk, customers view and buy your products, then, you contact the fulfillment company and tell them to process and ship the order.
Third-Party Fulfillment Services
Third-party fulfillment companies offer several services to businesses that make inventory management, storage, processing, and shipping easier.
- Set-up involves fulfilling your business’s needs in terms of inventory management. The fulfillment company manages your suppliers and matches the packing and shipping process to the needs of your business model and your customers.
- Intake involves the beginning of the inventory process. The fulfillment company receives inventory from your suppliers, which they then document and store. This process covers the whole system of inventory management, including physically unloading and sorting the merchandise, as well as keeping track of the products in online systems. Both your records and your fulfillment company’s need to be on the same page in terms of inventory.
- Storage and kitting are the next services offered by third-party fulfillment. Items need to be packed and stored uniquely depending on the size and number, as well as their location relative to the loading dock. Kitting refers to items that need to be stored in pieces and assembled after they have been ordered and are getting ready to be shipped. An organized fulfillment company will know which items need to be kitted to maximize efficiency.
- Finally, third party fulfillment companies manage your account. This means that they take calls concerning shipments, questions, complaints, and other logistics. This also allows fulfillment companies to keep you informed with analytics about your costs and profits when it comes to shipping and inventory management.
Advantages of Third-Party Fulfillment
For the owner of an eCommerce business, third-party fulfillment could come with major advantages. We say “could” because not all businesses should invest in third-party fulfillment. Consider these advantages and disadvantages, as well as the alternatives explained later, to determine if third-party fulfillment is the right move for your company.
1. Inventory Management
For companies that have the capital to invest in a fulfillment warehouse but don’t want to buy a facility of their own, third-party fulfillment offers greater control over their inventory. Without having to deal with the logistics, you can easily track, manage, and view your inventory. You never have to worry about selling an item you don’t have when you know it’s already in stock in the fulfillment company’s warehouse.
Therefore, third-party fulfillment offers a particularly cost-effective solution to completing orders for companies that have enough capital to invest in a bulk inventory and who know that their products will sell efficiently. You never have to pay to store products that aren’t selling, and you never have to process the sales yourself.
2. Location Advantage
If you manage your own warehouse, you have to pay for the shipping costs to your customers’ locations, no matter how much it hurts your profits. Most eCommerce businesses want to offer a free shipping arrangement, but this can be incredibly expensive if the bulk of your orders come from states far from your shipping location.
Instead, you can choose a third-party fulfillment company with warehouses near your major delivery locations. This will save your company money in shipping costs, as well as improve your relationship with your customers by allowing you to offer lower shipping times.
The location of the distributor represents a valuable advantage of third-party fulfillment in terms of costs that many retailers neglect to consider.
3. Fewer Expenses
In addition to cost-effective shipping procedures, third-party fulfillment also offers eCommerce businesses reduced expenses in other areas. Saving money on fixed storage facilities by renting third-party warehouses represent a huge boon to company expenses. You can rent the space your merchandise needs rather than opt-in for an entire facility that you have to manage yourself.
Managing a storage facility in-house comes with many additional costs that can be reduced or limited by using a third-party fulfillment company. These expenses include:
- Renting or leasing a warehouse to store inventory
- Packing services and other processing expenses
- Shipping costs related to location, shipping time, and storage volume
- Labor costs for storage facilities and related tax requirements
These expenses can mount up for a business that doesn’t take advantage of third-party fulfillment services. The efficiency and convenience of outsourcing the labor and rental costs associated with product storage and order fulfillment can have a noticeable positive impact on your eCommerce business’s profits.
4. Time Savings
As an entrepreneur in charge of a new or established eCommerce business, you are likely aware of the cost in time associated with storing and fulfilling orders yourself. If your small online retail store requires your attention full-time just to store and pack your orders, you may not have time to devote to other essential aspects of running your business.
These other areas include commissioning or writing blog posts and marketing materials for your store, creating helpful tutorial and marketing videos, and answering customers’ questions. Neglecting these other aspects of running your store may not be necessary if you employ the services of a third-party fulfillment company.
In other words, third-party fulfillment not only saves you money on services directly but frees up your schedule to run your company more effectively as well.
Disadvantages of Third-Party Fulfillment
These advantages make third-party fulfillment a brilliant investment for many business owners. However, you should also know the drawbacks of outsourcing fulfillment so you can decide if it’s the right move for your situation.
1. Financial Responsibility
When you outsource the storage, packing, and shipping process, you are financially responsible for your inventory even before it has shipped. Third-party fulfillment companies often offer insurance on damaged or lost items, as well as their experienced services in packing and shipping them safely.
However, you have to buy the inventory in bulk and take responsibility for it even if no one buys it. This is why third-party fulfillment works best for companies that have a quick turnover rate on popular merchandise.
2. Limited Inventory
If you outsource your inventory to a third-party warehouse, you have to buy the merchandise before a customer purchases it. This means that you can only sell what you already have in stock, which can limit your customers’ options.
This comes with some additional expenses related to third-party fulfillment that you can accrue if your business can’t turn over products fast enough. You have to pay not only for items that don’t sell but also for storing products for a long time while you wait for them to leave the shelves.
3. Overhead
One of the biggest drawbacks of third-party fulfillment is also the first thing you need to use it successfully: a healthy amount of overhead capital. This will allow you to invest in a bulk inventory from a distributor and pay for the use of the fulfillment company’s warehouse.
Without this upfront capital, third-party fulfillment cannot be a viable investment for your company. However, other fulfillment methods are available for those with less startup capital, as we will now discuss.
Dropshipping: What’s the Difference?
Dropshipping represents the main alternative for businesses that recognize the importance of fulfillment but can’t afford the overhead of third-party fulfillment. It comes with its own benefits and drawbacks, which will change which company should make use of dropshipping as a profitable fulfillment alternative.
The main aspect of dropshipping that makes it viable for eCommerce businesses with less startup cash is that you don’t have to buy and keep your own inventory. Dropshipping forces you to only purchase items from manufacturers after a customer has bought them. You buy it, they get sent to the dropshipper, and they take care of fulfilling the order.
This allows a smaller business to offer a wider range of products on their site without having to invest in them. If you’re considering adding an untested product to your store, dropshipping offers a relatively safe opportunity to test the product without having to invest in a huge inventory.
Disadvantages of Dropshipping
Since the dropshipper does not store large inventories, they may not have multiple warehouses that you can use strategically to save money on shipping. Businesses that plan on selling to wide areas of clientele may not financially benefit from a dropshipper’s less strategic shipping location.
Buying products individually also comes with higher prices per item than buying in bulk. In dropshipping, you buy the products only after they have been sold. This means that you can’t control your products’ availability and can’t save money by buying in bulk.
Since dropshipping requires less overhead, it also comes with less reward. In third-party fulfillment, you purchase an inventory in bulk. You are financially responsible for it, but you also have control over that inventory in terms of item selection, storage space, and availability.
Which Method Should You Choose?
Dropshipping may be necessary for companies that lack the capital necessary to invest in a bulk inventory and hire a third-party fulfillment company. However, those who can afford it should invest n a third-party as the most cost-effective choice for eCommerce fulfillment.
Not only does third-party fulfillment lower your business’s costs but it also increases the amount of product you can move off the shelves. The right fulfillment company has systems in place to help you manage your inventory, notifying your team when the maximum or minimum levels of your items are in stock based on your needs. They will be equipped with analytics to help you define and maintain these levels so that your customers can never buy items that are out of stock.
This inventory management advantage also applies to your business’s efficiency when you start processing a high volume of sales. However, you need to make sure that your fulfillment company has a model in place that optimizes efficiency during different seasons. If they rely on seasonal employees, this can impede their efficiency during your busiest times of the year.
It also makes a difference whether your fulfillment company uses wave or batch picking, which are two different ways of managing inventory. In wave picking, warehouse supervisors view the inventory as a whole and customize the storage and staging routes. Batch picking organizes inventory into groups so that warehouse workers don’t have to repeat trips to the storage facility for the same items.
As the company owner, you can’t change these methods, but it’s beneficial for you to know how your fulfillment company operates.
The Takeaway
Third party fulfillment offers eCommerce businesses the ability to outsource inventory management, product processing and storage, and shipping. It comes with many advantages, including cost savings related to bulk purchases, strategic shipping locations, and less labor devoted to product processing.
Other methods, such as dropshipping, come with their own pros and cons. They offer secondary options for companies who may not have the overhead capital to hire a third-party fulfillment company, rent their warehouse, and buy merchandise in bulk.
Use this information to figure out what a third-party fulfillment company can offer your business and how to make the most of its services in terms of cost and efficiency.