What is a Fulfillment Center & What They Do?

In Ecommerce, it’s not uncommon for businesses to use terms like warehouses and fulfillment centers interchangeably. While their uses and features overlap to an extent, both are distinct and serve different purposes.

As the name suggests, a warehouse is primarily used for storage of inventory. A fulfillment center serves as a hub for the entire fulfillment process in the supply chain.

In this article, we will help you understand what fulfillment centers are, what they can do for you, and how they work.

What is a Fulfillment Center?

A fulfillment center (or FC) is a warehouse space used by businesses to stock and process items for shipping. When orders are processed through an online store, the fulfillment center takes over the role of a retailer’s warehouse where the order will be picked, packaged and shipped by specialized teams.

A fulfillment center can be owned or managed by a third-party, or by the business itself. Those that are run independently usually report to larger distribution centers that use their services on a daily basis.

Related Reading: Fulfillment Center vs Distribution Center: What are Differences?

What is the purpose of a fulfillment center?

Ecommerce businesses today demand a level of speed, accuracy and efficiency that is not always possible using in-house resources or fragmented services. A fulfillment center works like a large umbrella, where businesses can manage inventory, receiving, picking, packing and shipping processes, under one roof.

Imagine how cumbersome the workflow would be, if the same items were sent to separate warehouses for storage, picking and shipping. A fulfillment center combines all these processes at one place – ensuring businesses are not losing precious time in the supply chain.

In addition, fulfillment centers often provide a level of specialization that is difficult to find in businesses or teams working independently. The level of specialization, accuracy and speed increase exponentially when you rope in a specialized fulfillment service.

What is an ecommerce fulfillment center?

An Ecommerce fulfillment center specializes in fulfilling orders for online retailers in the ecommerce space. Once an online merchant receives an order, the order details are forwarded to the fulfillment center.

The center will then pick, pack and ship the order to the customer. This process can sometimes take several steps if you are fulfilling internationally. A specialized ecommerce fulfillment center will be capable of handling multiple complex touchpoints within the process effectively.

This not only reduces the turnaround time for the business, but also ensures that customers receive their products within the promised timeframe. These of course, are just some of the benefits of using a fulfillment center for ecommerce.

What is a direct fulfillment center?

A Direct Fulfillment Center or DFC is a fulfillment center that ships directly to customers. In other words, if you stock your inventory in a warehouse on your own, and fulfill orders either in-house or outsource it to a 3PL/fulfillment service, you are essentially in a Direct to customer or D2C business model.

That’s precisely what a direct fulfillment center is. Large brands like Lowe’s and Amazon own direct fulfillment centers where they stock inventory and ship it to their customers directly.

What is a micro fulfillment center?

A Micro Fulfillment Center or an MFC is a relatively-new concept in the fulfillment services industry.

Micro fulfillment centers are smaller fulfillment centers that use a combination of automated fulfillment and manual fulfillment. The onus of last mile delivery is shifted to the customer who will drive down to the fulfillment center to pick up their product.

This model is the best of both worlds because it’s cost-effective, and offers all the benefits of a traditional fulfillment center. Most brands generally use preexisting stores for micro fulfillment. Typically, a part of the store is converted into a small (2000-10000 square foot) fulfillment space, where customers can pick up their orders.

MFCs focus on handling small-item orders, such as those that come through online marketplaces, generally in the FMCG space, such as grocery.

What does a Fulfillment Center Do? – Benefits

If you are new to ecommerce, you might wonder why you need to outsource fulfillment and utilize a fulfillment center when you can just choose to dropship instead.

Well, dropshipping is definitely a great business model for beginners. You can test the market, try out different products, ad combos and get an overview of how the business works. But once you get a grasp of the basics and you start to generate a steady volume of sales, you will start to feel the disadvantages of dropshipping.

And this is where a fulfillment center can make all the difference to your business.

Inventory control – When you ship inventory in advance to a fulfillment center and start selling, you can rest assured that you’ll never run out of stock. Any fulfillment center will integrate inventory management and forecasting tools to tell you way in advance of how much inventory you might need in the months to come.

This allows you to plan better, stock less and focus on the inventory you have.

Automated processes – A good fulfillment center will use an automated system to pick, pack and ship your orders for you. When advanced processes are coupled with the right software, it makes fulfillment effortless and error free.

Allows you to scale – With a good fulfillment service by your side, you can continue to add as many new products to your range, without worrying about the additional bandwidth required to fulfill it. From storage to fulfillment, a fulfillment center gives you all the additional bandwidth you need to expand.

What happens in a fulfillment center?

A fulfillment center is a hotbed of activity that manages multiple complex touchpoints in the supply chain. Here’s an overview of the workflow that generally takes place in one.

Receiving Inventory – The fulfillment center receives your inventory, a process that is called receiving in short. The inventory is unloaded, verified, counted and then transported for storage in bins and pallets.

Picking and Packaging – The fulfillment center has a group of people, processes and technology dedicated to picking your order. Pickers are trained to take products off the shelves and submit it to the packaging station. They package the products using state-of-the-art packaging equipment.

Shipping – Once an order has been picked and packaged it is dispatched for shipping.

Now picture all these processes taking place simultaneously 24-hours a day for millions of orders. None of the processes interrupt the workflow. They all happen concurrently like a well-oiled machinery. That’s the efficiency that comes with a fulfillment center.

Fulfillment centers aren’t just the logistics backbone of online shopping. They now have a direct impact on your bottom line and customer satisfaction.

What is the difference between a warehouse and a fulfillment center?

The internet, and even some 3PLs are guilty of using both these terms interchangeably. But there are some key differences in a warehouse and a fulfillment center.

A warehouse – As implied by the name, this is a large storage facility for goods. It can be used by different parties, but generally speaking it is used to store products for manufacturers and distributors. A warehouse is usually located in or near a port, airport or train station to make transportation easy.

Warehouses are designed for the sole purpose making inventory storage cost effective. This means, a brand can store inventory for an endless timespan at prices that don’t break the bank. As a result, B2B (business to business) companies are the most frequent users of warehouses.

They contain massive containers, large shelves, storage bins, and pallets with inventory neatly stacked according to their SKUs. Industrial equipment like forklifts are used to move inventory within the space.

Many large ecommerce companies now own warehouses, which they use to stock large quantities of inventory. When it’s time to fulfill, they generally ship the inventory to a fulfillment center. Small brands who cannot afford to outsource fulfillment to a 3PL may also choose to rent warehouses to stock inventory, since its cheaper.

A fulfillment center – A fulfillment center is also a large storage facility for inventory, that also contains storage bins, shelves, containers and pallets. But the similarities end there. Fulfillment centers are designed for complete product fulfillment. Apart from inventory storage, they also have dedicated systems to receive, pick and pack orders. More importantly, they fulfill those orders as quickly as possible. They are not designed for long-term storage.

In fact, the rule of thumb is that if you store your inventory for more than 30-days in a fulfillment center, you are paying for storage that you don’t need. This type of overpayment is called “dead inventory”.

As a result, fulfillment centers are generally used by B2C (business to consumer) companies that sell products directly to end consumers online. They stock limited inventory, sell it and restock as required. Fulfillment centers are usually located near large cities for easy logistics. Unlike warehouses, which work with minimal staff and are more static, fulfillment centers are buzzing with activity. There’s more workforce, less industrial equipment, more automation and a lot of movement.

How much does it Cost to Use a Fulfillment Center?

The cost for using a fulfillment center can vary depending on the company, the facility and your requirements. How much volume are you moving each month? What kind of product is it? But generally speaking it is very affordable.

Here’s a brief breakdown of the charges involved.

Set Up Charges – Most fulfillment service providers will have a standard set up fees. These are flat rates ranging from $500 to $1000. So it won’t change depending on your volume. It includes the fees to onboard your business and sync it with their cloud-based software, access to training materials, an account manager who will handle your queries, and help you with the set up and your first inbound shipment.

Receiving charges – A warehouse manager will have to receive your shipment, inspect it and maintain documentation from the driver. This will include scanning the goods, recording them into the system, updating you on the status of your inventory, and finally storing them away. This can be an hourly rate ranging from $10 to $50 per hour. Some fulfillment centers charge per unit, which can be a flat rate per pallet.

Storage – Some fulfillment services charge for storage space by the cubic foot, while others have a monthly fee. The price depends on your volume and type of inventory. As we said, fulfillment center storage is expensive and your idea should be to clear inventory as fast as possible. Storage charges can range from $5-15 per pallet, or $0.25 to $0.75 per cubic foot.

Picking Fees – Picking involves picking up the items in an order from storage and moving it to the packaging station. These fees are generally charged per product. It can be a flat fee for the first item in a pick and additional charges for other items, or it can be a flat picking fee for all items in an order. It generally ranges from $1 to $3 per pick.

Packaging fees – Packing involves putting your items into boxes, envelopes or other material that will be sent to the customer. This can be a flat fee based on the dimensions of each item.

Shipping – Different fulfillment services have different shipping rates and plans. Some use the product dimensions only to determine shipping costs. Others base it on the proximity of the destination from the warehouse where the product is stored. The farther the distance, the higher the cost.

Returns – Most fulfillment centers will handle returns, but you should make sure to clarify this before hiring them. Returns are common for ecommerce companies in certain product niches like fashion, apparel and accessories. A fulfillment center that handles returns will accept returned products, inspect them, and restock it to inventory or dispose it off. This can be flat rate of $1-3 per unit, depending on your volume.

Related Post: 5 Best Return Management Software for Ecommerce

How to Find the Right Fulfillment Center Provider?

The demand for ecommerce fulfillment has burgeoned in the recent past. As a result, there are many new players in the market who offer competitive rates and a bouquet of services to attract customers. However, that doesn’t mean you should rush into signing up with the first provider you come across.

It’s important to find a service that fits your business needs. Here are some of the most important points you should consider when vetting a provider:

1. Warehouse locations

What is your primary target market? How soon do you wish to deliver the product? What are the geographical regions you want to cover? If your target market is mostly in North America, then choose a 3pl fulfillment service that has warehouses near your destinations. If your target market is in Europe, then you might want to consider a fulfillment service provider with a sizeable footprint in Europe instead.

Just because a service has one or two warehouses in your target market does not make it an effective choice. You ideally need a network of warehouses for easier inventory distribution and lower shipping costs. That brings us to our second parameter.

2. Delivery speed

In modern eCommerce, the delivery speed alone can influence your conversion rates. It’s particularly important to be able to offer the lowest shipping speed to customers in key markets like North America and Europe, where you are automatically pitted against the ecommerce giants.

Look for fulfillment services who can offer you 2-day and overnight deliveries in key markets. This is closely linked to the size and expanse of their warehouse network to be honest. So, if you can select a fulfillment service that has warehouses in strategic locations, then that will give you an added advantage.

3. Simple pricing structure

As we mentioned above, the pricing for fulfillment can be bunch of different numbers and calculations, or it can be a simple, flat rate. Add $3 to your product cost and you are done. It’s easier to calculate your ROI, your profit and your margins.

On the other hand, some 3PLs have pricing structures that are more confusing than a high school math problem. Business owners can spend days trying to crunch the numbers, or they might end up feeling cheated when the balance sheet is done. Choose wisely. You do not want to deal with hidden charges that eat into your margins.

4. Services that are customized according to your needs

Look for a fulfillment service provider who can offer you exactly what you need, not what’s available as a part of their package. Not all fulfillment service providers offer warehousing, inventory management and returns, for instance.

Some only provide shipping, which makes them a freight forwarding service rather than a full-fledged fulfillment service. Do they have industry-relevant expertise? Are they willing to go beyond contractual terms to offer you some customization?

Can they accommodate a scaling-up in your business?

You might start small, but you wouldn’t want to miss out on the opportunities when they knock at your door.

5. Customer support

A reliable and efficient customer support team can do wonders for your business. This is particularly important if the fulfillment service provider is an unknown brand in the market and you are using their services for the first time. What customer support channels do they offer?

How responsive are they on these channels? What do customer reviews speak about their support team? Do they use template responses? Or does a real person take the onus for solving your queries?

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Fulfillment centers play a vital role in your ecommerce business, especially when you are a SMB looking to scale up your business. The right fulfillment services can do the heavy lifting for you, while you focus on growing your brand.

We hope that the information in this article will be helpful for you to understand the different ways in which fulfillment services function and to find the right fulfillment service for your business.

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