Benefits of Using a Fulfillment Center
Fulfillment Centers (also known as 3PLs) are companies that store and ship products on behalf of other businesses. Their software connects to your online store or marketplace so they can receive order information every time you make a sale. Upon receiving this information, they pick & pack items, and then hand off packages to the carrier for final delivery to your customer.
Are you an online business that’s trying to figure out whether you should hire a fulfillment center or not? I’m going to outline some benefits in this article to help you make that decision.
Most small businesses start off fulfilling orders themselves but as the order volume increases, they quickly realize how much resources fulfillment can take up. There are so many costs associated with fulfilling orders on your own and it takes a long time to finally optimize operations. It’s a continuous process because business cycles can fluctuate and operations need to adjust to meet new demands. This can be extremely frustrating and costly once you realize the amount of time that goes into operating the fulfillment side. After all, your business also has so many other legs you need to take care of such as product procurement, marketing, accounting and all the other administrative tasks.
Once you’ve reached an order volume of 100 orders per month, I think it’s a good idea to start looking at fulfillment services. Outsourcing fulfillment is not applicable for every business but I’d say it puts most businesses in a stronger position.
Some of the biggest benefits of hiring a fulfilment center are:
Expand to New Markets
Reduced Operational Costs
Focus on Growth/Selling
Flexibility/Easy of Scalability
There are disadvantages of using a fulfillment center as well, but we’ll focus on those in a different article. Check out the next sections for a breakdown of each benefit.
Raise your hand if you don’t like cheap shipping. Your hand is probably still on your mouse (or touchpad or screen). Everyone wants better shipping rates but most people aren’t in a position to demand them.
As a small business who ships 50-300 orders per month, you are eligible for volume discounts from carriers. You can create an account with the carrier (Fedex, UPS etc) and then speak to your account rep about better pricing. They’ll most likely start you with a 10-15% discount off their published price.
The discounted rates you get are way better than what an individual who wants to ship a single package from New York to Boston gets. The carriers give you this discount because they recognize the value your shipping volume brings. Shipping volume. Keep this in mind.
Now compare your shipping volume to a fulfillment center. A fulfillment center ships packages on behalf of hundreds of businesses, shipping thousands of packages per day. Now that kind of volume makes carriers salivate (yes FedEx employees somewhere are salivating right now). Thanks to their large shipping volumes, fulfillment centers are able to negotiate massive discount rates from carriers. I’m talking near 30-60% off (it gets even higher for express and international services).
Discounts in this range are not achievable by a regular small business but the aggregated shipping volume of 100s of businesses makes this possible creating a competitive advantage.
The Juicy Part
Fulfillment centers pass on these discounts to their customers. They do this because besides being a competitive advantage, it also doubles as a strong selling point. As a result, a business who was previously getting 10-15% off shipping is now taking advantage of higher shipping discounts which weren’t previously possible with just their own volume.
It gets even better. Most fulfillment centers have relationships set up with multiple carriers. This allows them to get quotes from different carriers for every shipment. At this point, their software compares these quotes to ensure each package is shipped with the carrier offering the best price.
Cheaper shipping is one of the biggest benefits of using a fulfillment center/3PL.
Expand to New Markets
Let’s say you have an amazing business selling speakers in Japan. Japan is a great market but you want to expand your business to customers in North America. Yes, you could ship directly from Japan but that’s probably too expensive and delivery times would be too long. On top of that, your customers will also have to pay duties/tariffs because the item is coming from a foreign country.
Alternatively, you could immigrate to North America and set up your own operations, but that comes with an incredibly large set of problems. Let’s not go down that rabbit hole for now.
In this case, hiring a fulfillment center makes a lot of sense. You can store and ship products from a fulfillment center in the market of your choice. Once you make the sale, the fulfillment center ships the order to your customer who will receive it within a few days. This customer is going to be way happier than your competitor’s customers who are having to wait weeks for their products to arrive.
It’s also common for fulfillment centers to process returns for their clients. In the event of returns, your customers don’t have to ship back to Japan but instead they can ship back to the fulfillment center. The fulfillment center can consolidate your returns and then ship them back together to save you money.
Reduced Operational Costs
Fulfillment centers are not only for businesses looking to expand into new markets. They’re incredibly useful for domestic business as well.
If you’re fulfilling your orders internally, you probably have at least the following expenses:
- Cost of Supplies
These are the absolute surface level costs and there’s dozens of other things you are paying for as well. As the number of expense heads increases, the more you have to manage. As you manage more things, it becomes harder to be efficient at managing each. This usually results in a snowball effect and that snowball is expensive.
Look, expenses aren’t a bad thing but the point I want to make here is that unless you’re doing a large enough volume and have streamlined your operations, a lot of that cash is being burned. You may not realize it until it’s gone.
Further, a lot of these costs aren’t just expenses. They are commitments as well. If you’re currently fulfilling orders on your own, you probably have a signed lease for a few years. If your business isn’t doing so well, you can’t just stop paying rent. The landlord would sue you. If your business grows, now you need to find a bigger location. Finding a bigger warehouse doesn’t mean you can now leave your smaller space. You still have to pay rent for that space as well. For businesses that are growing quickly, this can be a big pain.
With fulfillment centers, you only pay for what you use. You know exactly what you’re paying for and you can estimate the costs before you start. Each month, you’ll be able to look back and see how much you spent. This is extremely difficult to do on your own. Using a fulfillment center helps you avoid these costs before they turn into problems.
We’re going to discuss this further in other sections but let’s talk about Amazon quickly.
I watched an interview with a C-level Amazon rep where they were asked what distinguishing qualities they would attribute to the growth of Amazon. Her answer: their unmatched delivery process. Yes, it’s no surprise, everyone likes faster shipping and ensuring your customers are getting products fast should be your top priority as an eCommerce business.
When you order something online and it takes a week to arrive, that’s considered a normal transaction. When you order something and it shows up the very next day, that’s called an experience. The feeling customers experience with faster shipping is like magic.
I’m going to give you a little hack and a reason to love faster shipping.
You probably have had friends complain about late packages and these very same friends also rave about how quickly their favourite brand delivers. Let me introduce you to the brand loyalty pyramid:
I’ve translated this from marketing english to regular english. Look at it this way:
- Unhappy Customers
You know those people who can’t shut up about their favorite brands/products (yes, your friends), those guys are advocates. To a brand, they are the most valuable customers. They spend more, they spend often and they also love to tell others about you.
One of the easiest and fastest ways to turn a customer into an advocate is through faster shipping. You can literally do this overnight (pun haha yes sorry).
Fulfillment centers can help you provide faster shipping to your customers whether they are domestic or international. International is pretty straightforward but domestic gets a little creative. Let’s look at the options:
For Domestic/Local Customers
Amazon has 175 fulfillment centers across the world. 75 of these are in the United States alone. Why? Their customers like faster shipping that’s why.
Okay, but why 75? Distributed Inventory
Distributed inventory is a fulfillment concept where inventory is carefully distributed amongst fulfillment centers to be closer to the customer base. This is only possible with fulfillment centers that have multiple locations and they are strategically located for this purpose. I’m going to give you 2 cases.
If you’re shipping from 1 central location, the customers close to that location will get orders really fast and customers further away will receive their orders a little bit later.
If you evenly distribute your inventory in fulfillment centers on each side of the country, then a large part of the population is able to receive packages quickly.
For International Customers
We discussed this before in how it applies to new markets but let’s quickly recap. If you are shipping products from Hong Kong to Canada, it’s going to take 5-30 days depending on the service used. If your products were being shipped from Canada to your customers in Canada, you save a lot of time. On top of that domestic shipping is way cheaper than international shipping so using a fulfillment center is a non-brainer if your client base is outside your country.
Focus on Growth/Selling
If you’re an eCommerce business owner, you’re probably not stress-free. You’re in business because you are great at what you do. Along the way, you’ve probably gotten very good at other things such as Arithmetic, Marketing, Accounting etc. There are so many components that make up a business and putting it all together isn’t easy.. As I write this, I’m thinking about how much I admire each and every one of you. Keep going.
A lot of people are in your position and a lot of people get stuck. Stagnation can be a result of external factors but it can also be a result of doing too many things at once. You are probably doing too many things already and doing something like picking and packing orders is something that takes up a lot of time.
Delegating the picking and packing part of your business can help free some time for things you want to be focusing on such as growing your business and increasing market share.
Think about the work your staff does. At some point, you were probably doing everything they are doing. Or, it could be that you hired them because you didn’t know how to do it.
In both cases, a task was assigned to someone so you could spend time focusing on what you do best. Fulfillment is a big task. It has many moving parts and requires a lot of operational efficiency to get it right. With so many fulfillment options available, it’s easy to find one that matches your needs. It can help you save a lot of time and a lot of undue hardship.
If you’re a business owner, time is your number one asset. Challenges are great but undue hardship isn’t. If you find yourself wishing you had more time to spend on things that mattered, a fulfillment center is probably the right move for you. Most fulfillment businesses have scaled to a point where they become affordable. If they weren’t affordable, nobody would use them.
Flexibility / Ease of Scalability
This one is important. A lot of business growth is unprecedented. You often hear times where a successful marketing campaign results in a massive boost in sales. You also hear of products making an appearance on shows like Shark Tank/Dragon’s den and all of a sudden they have a huge spike in sales.
Their current operations may not be able to facilitate this type of growth. At this point, many businesses turn towards fulfillment centers. It’s a great idea but it’s even better if you’re set up with a fulfillment center beforehand. Fulfillment centers are experts in forecasting.
They already have staff that can pick and pack orders for you and the ability to easily go from processing 8 orders a day to 800 orders. This is way harder to pull off if you’re fulfilling on your own.
For a lot of businesses, we see sales spikes in certain seasons. If you’re selling halloween costumes, most of your orders are going to be near Halloween. Most businesses see a spike during the holiday season. Some stores get 20x the orders on events like Black Friday/Cyber Monday. Wouldn’t it be so much better if you just pay for expenses when you’re making sales and not year long?
Another case can be made for kickstarter campaigns. Oftentimes, it’s really smart people who have managed to create an awesome product and now they have 20,000 pre-orders. That’s a lot of orders for 1 person. The seller needs to get a lot of work done in very little time to ensure their products get out to customers as promised. It’s extremely difficult to pull this off successfully - especially when your product/business is in its early stages.
Anyone in this position should definitely look into hiring a fulfillment center. This will take off a lot of the stress and workload. It’s important for people in this position to quickly push their product to market and using a fulfillment center will get the job done.
Like most things, I like knowing the cost upfront. Even when I’m shopping at the grocery store, I usually have my total summed up before I make my way over to the checkout. This has nothing to do with anything besides grocery shopping and fulfillment being equally important. Oh and also, that feeling of not knowing what my cost is until after I’ve done all the work isn’t the best feeling. This is a problem with self-fulfillment. You are spending money upfront on a lot of expenses and then later finding out what your true cost is. To get to the true cost, you also have to go through an accounting nightmare.
I think this is a great benefit with fulfillment centers. You can actually estimate how much your monthly expenses are going to be simply by looking at the fulfillment center’s prices. Yes, fulfillment centers aren’t just a flat monthly rate as different services cost different prices but at least you’re dealing with 1 party for the entire fulfillment component.
When you’re fulfilling on your own, there are dozens of bills you have to take care of. Even for something like Supplies, I can already think of:
Packing Slip Window
I spent 60 seconds thinking about these. I’m sure I missed a lot but wow…it gets exhausting right? Now you need to factor the cost of all these things to figure out how much you’re really paying. On top of that, you might be buying tape from a different supplier than your packing slip windows than you would for your pens and markers.
If you’re somebody who doesn’t like surprises (especially at checkout), I think hiring a fulfillment center can give you the ease and peace of mind. I use so many different services to power ShipHype and it’s nice knowing what I’m paying. This helps me ensure I stay within budget and most importantly having control over my bottom line.
Should I Hire a Fulfillment Center?
I run ShipHype and therefore have a level of bias when someone asks me if they should use a fulfillment center or not. In my option, fulfillment centers should be viewed as an investment tool. They have a lot of benefits and when used correctly, can help take businesses to the next level.
Although fulfillment centers have a lot of advantages, I’d be lying if I said they’re the perfect solution. I’ve presented the major benefits and outlined reasons why people choose to outsource. Whether you agree or disagree with me, you’d be totally correct. I can think of so many businesses whom a fulfillment center wouldn’t work for. I can also think of the drawbacks of using fulfillment centers. I’m going to save the breakdown for a different article but I think lack of control and customization options is something that comes to mind right away.
Every business is different with different needs. As a former eCommerce store owner, I understand this fully. I also understand that I don’t know everything and that’s why ShipHype will never be a final product. We are constantly growing and working to be better than we were yesterday. I’m proud to say we are the most customizable 3PL out there and can tailor our services to meet any requirements.
If you’re still unsure and want to speak to someone, get in touch with one of our experts. We’ll start by evaluating your business goals and then understanding your specific needs. We’ll provide you with a tailored plan and let you know where we can add value. Ultimately, this is a decision that you need to make because you understand your business the best!