At some juncture in your eCommerce business journey, you’ll reach a point where you start to feel the need to outsource some of the processes that are too cumbersome for you to manage in-house.
More often than not, these are processes in the supply chain that have to do with order fulfillment. Be it warehousing, inventory management, pick & pack, or shipping, these processes require a significant amount of time, labor, and infrastructure.
That’s where outsourced fulfillment comes into the picture. In this article, we will break this concept down into simple terms, and demystify the reasons why you should consider it.
Fulfillment is the process by which an order is picked, packaged and shipped to the customer. By outsourcing this process, you hand over responsibility for some or all of these tasks to a third party.
Fulfillment is a series of complex processes that demand a fair amount of resources from a business. Doing each of them in-house risks making costly mistakes due to lack of experience, or tying up too many resources.
Rather than spend so much time, energy and capital to manage fulfillment in-house, it is often more efficient for companies to hire an experienced outside party, called a fulfillment service.
A fulfillment service is any business that specializes in carrying out one or more aspects of order fulfillment for another company. For instance, a 3PL that manages inventory, storage, picking, packing and shipping, in return for a fee.
Not all fulfillment services offer all these services though. Some 3PLs will only handle shipping, which means that they are freight forwarding services. Some will offer only some parts of the fulfillment workflow, while others offer a more inclusive service.
Fulfillment services do not charge the same fees either. Some have a simple fee structure that’s easier to understand, while others will throw a bunch of numbers at you that will be mind-boggling.
Ideally, you should compare a number of service providers before signing a contract, to find the one that’s right for your business.
While outsourced fulfillment is a catchall phrase used to describe any service where fulfillment is carried out by a third party, there are several models of outsourced fulfillment.
The popular ones are dropshipping & 3PL Fulfillment.
Dropshipping is a fulfillment model where you don’t actually store the products your customers purchase. A third party (generally the supplier) will store the inventory, and ship the product directly to your customer on your behalf.
Dropshipping is considered to be the most beginner-friendly fulfillment model, because it’s simple and straightforward. It also happens to be the least expensive option because you do not have to invest in inventory or fulfillment.
Here’s a brief overview of the dropshipping fulfillment process.
Sign up with a dropshipping marketplace – You will need to create an account with a dropshipping marketplace like Aliexpress or Spocket. Dropshipping marketplaces are platforms that connect you (the business) to product suppliers who can be based anywhere around the world. For instance, Aliexpress lists thousands of sellers who list millions of products that you can sell. You can create free accounts on most of them, but some have membership tiers that grant access to additional features.
Select your products – When you sign up, you will have the option of browsing thousands of products on the marketplace. You can search for products by browsing through categories, or you can even type in a specific product name. Select products and list them for sale.
After-sales – Once you generate sales, the software that you use (Oberlo, Shopify or WooCommerce for example) will automatically send out the order to the supplier. The supplier will then ship the product to your customer on your behalf. The software will automatically sync with the dropshipping marketplace and update the order details, which will be sent to the customer as well.
Dropshipping has become very popular in recent years due to how simple it is. You can set up a shop in a matter of minutes, and you don’t need any technical expertise to do it. The software that connects you with the supplier is also very easy to use, and even entry-level sellers can get everything setup in no time.
But it offers advantages that go beyond the ease of use.
Low Overhead Investments – The biggest draw of dropshipping is that you don’t need to invest in inventory. In a traditional eCommerce business model, a retailer needs to purchase a certain quantity of inventory and stock it in a warehouse before they can sell them. This is what happens in 3PL fulfillment as well. The first step is to send your inventory to the 3PLs warehouse. But dropshipping allows you the luxury to skip this step. You can start selling your products immediately without having to purchase inventory, which drastically reduces your investment if you’re just starting out.
Automated & Free Fulfillment – In dropshipping, the onus of fulfillment usually falls on the supplier. The software you use will automatically push order information to the supplier, who then ships it directly to your customer on your behalf. This eliminates the need for all the complex processes in the fulfillment workflow, which saves you time so you can focus on other areas of your business.
Some software may require minor manual inputs to complete order fulfillment in dropshipping. But you can rest assured that it’s minimal and pretty close to being automated.
Easy to calculate ROI – In dropshipping, the product cost that’s displayed on the marketplace includes the cost of fulfillment. So, you know exactly how much you’ll be spending on each order, and that allows you to easily calculate your return on investment.
In a 3PL fulfillment model, the cost of fulfillment depends entirely on what service you choose. It can be as simple as a flat fee to the workflow broken down into individual charges. This adds an additional layer of complexity when it comes to calculating your profitability.
At some point, every dropshipping business will want to scale and bring in speed and efficiency to the workflow. As easy and simple that dropshipping seems to be, it takes away most of the control over the fulfillment process and inventory management.
These are vital parameters when it comes to scaling. That’s where a 3PL fulfillment service comes into the picture. A 3PL or 3rd Party Logistics company is a specialized and professional warehouse and fulfillment company that specializes in servicing eCommerce businesses. They will take over the job of inventory management and fulfillment from you, allowing you to focus your attention on other areas of the business.
The 3PL will handle all aspects of fulfilling your orders from storage, picking and packing to shipping. Some 3PLs will also handle returns and issues with your products as well as customer service on complaints and issues with orders.
This is a great way to take your business to the next level.
Here’s a brief overview of how a 3PL ecommerce fulfillment process works:
Receiving inventory – After you sign up with a 3PL, you will have to send the inventory to their fulfillment center. The warehouse manager will count the items and assess the condition, before sending it for storage. The inventory will be added to your account on the 3PL’s cloud-based software, so it’s accessible for you to track at all times.
Pick & Pack – These are separate processes that we have clubbed for easier understanding of the workflow. In pick, inventory from your orders are selected based on a picking list. They are packed depending on the packaging material that you have chosen. Packaging material may include clear plastic bags, boxes with compartments and bubble wrap. Some 3PLs will offer customizable packaging options as well.
Shipping – Once the order is confirmed and packed, it’s then sent to the shipping company that you have contracted with for orders. Some 3PLs partner with multiple shipping companies, while others may only work with one. The 3PL will then add the tracking information to your eCommerce marketplace, which generally completes the fulfillment process.
Returns – Some 3PLs also handle returns for you. When the customer initiates a return, the 3PL will receive and inspect the item before adding it back to the inventory or disposing it off based on your instructions.
3PL fulfillment brings efficiency, speed and professional expertise to your eCommerce business. Many brands that started off trying to manage fulfillment in-house have shifted to a 3PL fulfillment service because fulfillment is a complex process. Sometimes, having the infrastructure and investments is not enough.
Many brands that started with the dropshipping business model also eventually shift to a 3PL fulfillment service because it gives them more control over fulfillment, and makes business decisions easier.
Speed & Efficiency – 3PLs are professionals when it comes to fulfillment and supply chain management. They invest heavily in the best technologies, skilled workforce, warehouse networks, and inventory management software to make sure that orders are processed quickly and efficiently.
Depending on the 3PL that you choose, you may be able to deliver items overnight or in 2-days in primary marketplaces. That’s impossible to achieve with dropshipping fulfillment.
More control over the business – In dropshipping, it is not uncommon to face inventory shortage in peak season. Since the supplier supplies the same inventory to multiple retailers, peak season often results in an unexpected inventory shortage for you. This often leaves you in the doldrums with pending orders and no inventory to fulfill it with.
In a 3PL fulfillment business model, you will stock inventory in advance which prevents such inventory shortages. And you don’t have to worry about missing out on orders during peak seasons because the warehouse will be stocked appropriately. Most 3PL software has an AI-powered inventory prediction system that can forecast demand for you.
While dropshipping may appear attractive because the supplier manages fulfillment, it does not take into account the long-term success of the business. In order to scale your business, you have to invest in building a scalable model that gives you ample scope to grow.
More Profitable – In dropshipping, the cost of fulfillment is included in the product cost. That may appear to be cheaper. But in reality, you can make more profit with a 3PL fulfillment service.
You can source your inventory from the manufacturer or from a wholesaler at a cheaper prices. If you select a 3PL fulfillment service that has a simple, all-inclusive price structure, you can easily predict your ROI and calculate your markups. Since you have inventory in stock, you can also charge higher during peak season when your competition is dealing with slow delivery times and inventory shortage.
In simpler terms, when you outsource fulfillment, you don’t have to worry about fulfillment. The inventory is already stored in the warehouse, ready to ship out.
So, when should you outsource fulfillment and what fulfillment model is better suited for your business?
Let’s explore some common situations.
You should select an outsourced fulfillment model depending on what stage of eCommerce entrepreneurship you are at presently. If you are just starting out and are unsure about where to begin, you should start with a dropshipping model. It’s easy and will help you figure out the right approach for your business.
With the low upfront investments and free fulfillment, you can test the waters. Most dropshipping businesses test multiple products before investing heavily into inventory, marketing, and other resources.
If your business is scaling, you should shift to an outsourced 3PL fulfillment model because it allows you more control over inventory management.
Once you start to generate steady sales, you will want to improve your customer experience. And a common way to do that is by offering faster shipping. Regardless of whether you are a startup or a one-man operation, you are automatically competing with large marketplaces and retail giants.
This is where a 3PL fulfillment model comes into play. Most 3PL warehouses allow you to choose and order inventory and distribute it to their network of warehouses close to your target market for future sales. This makes it possible to leverage 2-day and even overnight shipping.
Stocking inventory in warehouses closer to your key markets generally helps you reduce your shipping costs. You can use software to forecast demand in specific areas and stock inventory in strategic locations close to these markets only. That may mean a substantial cost reduction for a small business owner.
Also, in some cases, such as when the item is large and heavy, there can be a significant difference in shipping cost when you ship from an international destination, vs. shipping domestically. We did a study on this that might interest you.
Ecommerce businesses sometimes overlook the importance of SKU optimization. A SKU or a store keeping unit is simply the way you identify your product. If you have too many SKUs, it can translate to higher storage costs and more time taken to account for inventory in one place. Not to mention that it makes fulfillment all the more complex.
One of the reasons why businesses often end up with too many SKUs is to compensate for stock outs. They store a lot of inventory and it becomes more complex to manage these SKUs in-house.
Outsourcing fulfillment helps you navigate through this chaos. 3PLs are skilled and experienced to handle millions of SKUs with no problems whatsoever. So even if you think that you have one SKU too many to manage in-house, the 3PL will have no problems handling it.
When you are a small business and looking to save every penny, it is sometimes prudent to self-fulfill. We have clients who handled in-house fulfillment from homes and garages at the beginning.
But when you start to generate a steady volume of sales, you will quickly realize that you are losing time and money running the business. In-house fulfillment is too limiting and can easily become an obstacle if you are looking to scale.
Outsourcing your fulfillment to a capable team will take a huge burden off your shoulders. You will be able to get back to what you do best, which is growing your business and increasing sales.
We hope that this helps you understand how outsourced fulfillment works, what it costs and the different models of outsourced fulfillment. Our brief guide also explains which model to choose at what stage of your ecommerce business.