What is a Fulfillment Company and How do They work?

By Jack Zhou
Updated on March 8, 2022

Every eCommerce business comes to a juncture where they must choose an optimized fulfillment workflow that allows them to scale without having to deal with complex logistics.

Fulfillment companies are the answer to this problem. But how do these companies work? And why choose one over DIY fulfillment? We will explore the pros and cons of working with fulfillment companies as well as give you an overview of the nitty-gritty of how one functions.

What is a Fulfillment Company?

A fulfillment company is a 3rd party service that specializes in order fulfillment. They invest in creating state-of-the-art fulfillment workflows that are capable of handling the storage, pick & pack, shipping and even returns with zero hassles.

Fulfillment companies may also be called 3PLs (third party logistics) or fulfillment centers in some settings.

Most fulfillment companies do not own warehouses. They lease warehouses across their target audience’s primary markets and focus instead on creating a smooth network of curated warehouses that are expertly managed.

They are specialized to keep their order fulfillment rates significantly higher than standard eCommerce businesses by offering same-day, or even multiple-hour pick & pack turnaround times.

How do Fulfillment Companies Work?

Fulfillment companies have a tried and tested workflow that allows them to provide customers with optimal order fulfillment and distribution experience.

Here is a step-by-step walkthrough on the key processes in the fulfillment workflow.

1. Receiving, and verifying inventory

The first step in fulfillment workflow is receiving your inventory. A warehouse manager will oversee the inbound inventory shipment, ensure that inventory is unloaded safely, the contents are verified, counted, organized and stored in the center until it is ready for processing.

Some Fulfillment companies can distribute inventory to a network of fulfillment centers for lowering shipping costs, or store it all in one centralized fulfillment center, depending on the business’s needs.

2. Storing Inventory

The next step is to accurately store the inventory for easy retrieval and reduced storage costs. The storage options generally are in the form of shelving, racks, bins or cubbies. The amount of storage space as well as the total amount of time that it is stored for, will affect your total storage cost.

That said, fulfillment companies and centers are not ideal for long-term storage. The storage costs will be significantly higher than a standard warehouse, and unlike standard warehouses, fulfillment companies can have fluctuating storage costs during peak seasons. We will speak more about this.

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3. Syncing your store

Every fulfillment company will offer a backend software solution that syncs with your eCommerce store so that order details, inventory levels, shipping information and tracking can be updated in real-time.

Reliable syncing eliminates the need for time-draining manual data entry that is common with old-school eCommerce businesses that handle their own logistics.

Once your online store has been synced to the fulfillment company’s cloud based portal, order details will be synced on autopilot in real time. Generally, the entire process is 100% automated and does not require any manual intervention. Having said that, there are some fulfillment companies that do require manual order updates with CSV order list uploads. So it’s important to check this beforehand.

It’s also important to check whether or not the software has an easy-to-use interface.

4. Picking Inventory

The next step is to pick items from the inventory based on the orders generated. A picker, who is skilled in locating and accurately collecting inventory from storage shelves, will then go around collecting the items from the stored inventory.

This sounds like a simple process. But it’s actually the most complex part of fulfillment. Once the picking is done, the picker will consolidate these items according to the order and dispatch them to the packaging station.

5. Packing

Each fulfillment company offers multiple packaging options that are customized according to their client’s needs. This ranges from multi-item shipments (orders with multiple items in them) to single-item shipments (orders that contain only one product).

The fulfillment company will pack the orders depending on the packaging requirements specified in the order details. Some even offer customized packaging materials and branded marketing inserts as a value added service.

6. Shipping Inventory

After the orders are sorted, they are passed on to a shipping management system where they will be allocated to specific carriers. Most fulfillment companies allow you to compare carrier rates and speeds, or they can automatically allocate shipments to carriers based on customer-defined rules.

The shipping manager will send out the order details to the carrier(s) selected for each shipment. The last step is to send tracking information to your customers and to you, so that you can stay on top of the order delivery and handle customer queries if any.

How much do Fulfillment Companies Charge?

Many Fulfillment companies charge a flat fulfillment fee and a separate storage fee, which is the easier pricing model to understand. Just add the two and you have a definite number that you can then add to the product cost, to calculate the ROI.

But a lot of companies also have a complex pricing system where each touchpoint in the fulfillment process is broken down into individual prices. Goes without saying that this is a complex pricing model and it’s crucial to note this before you sign the contract.

Here’s an overview of the different charges that fulfillment companies generally levy on a business.

Set Up Charges – This is a one-time charge that the fulfillment company charges for setting up the account. It will integrate your store with the backend software and will also create a customized portal for you. It ranges from $500-1000.

Receiving Charges – The company will charge you a receiving fee for receiving and verifying inventory before logging it into their software. This can range from $25-50 per man hour. You will be billed for the total number of man-hours it took to unload and store the inventory.

Storage Fees – Storage fees are generally separate from the fulfillment fee. Depending upon the company, this can either be a flat fee based on the number of bins and pallets that the inventory is stored in, or it can be based on a volumetric storage charge where you will be billed for every cubic feet that the inventory occupies. This can range from $10-15 per pallet or $0.25 – $0.50 per cubic feet of storage. As a business, you should try to clear the inventory from the fulfillment center before 30-days.

Pick & Pack – Picking and packing fees are applied on top of the storage fee. This includes picking the product out of inventory, packing it up and sending it to the customer. This can range from $1 to $2.5 for the first pick in the order and up to $0.50 for additional items in the order.

Shipping – Shipping fees can either be a flat rate depending on the fulfillment company or it can be based on Shipping zones, which are calculated based on the distance of the destination from the warehouse where the inventory is stored. This is where it might be more cost-effective to pick a fulfillment company that uses intelligent inventory distribution in multiple warehouses.

Hidden Charges – In addition to the obvious, some fulfillment companies are notorious for tacking on additional charges. For instance, some fulfillment companies claim to handle returns. But both kitting, as well as discarding inventory is charged extra. Some companies also charge you for errors that occur at their end.

Benefits of using a Fulfillment Center

All things said and done, why would you want to opt for a fulfillment company in the first place? What are some of the benefits of using a 3PL fulfillment service provider?

Here’s what.

1. Lower your shipping costs

A fulfillment company with a network of warehouses in your primary target markets will be able to provide you with a shipping rate that’s lower than what it would have been, if you shipped from origin. For instance, a dropshipping service, which can charge obscene shipping prices for international shipping.

Also, this gives you access to much quicker shipping times at a reduced cost. We are talking about 2-day shipping here in key markets. That alone can help you amplify your sales volume.

2. Reduce operational hassles

Working with a shipping company takes off a lot of operational hassles away from your plate. This includes managing inventory, picking and packing and dealing with complex shipping requirements.

As a business, you should be focusing on your skills, rather than having to manage the logistics. More importantly, you can dedicate more time towards your marketing goals that will eventually help grow your brand.

3. Reach a wider target audience

With outsourced fulfillment, you can expand your market reach exponentially. For instance, if you store inventory domestically, you can cover most countries in 2-days.

If you are on a budget, you can target the US with domestic fulfillment and store inventory in China for global fulfillment. All you need is a fulfillment company with centers in both these locations. They can help you distribute inventory too.

4. A better customer experience

The end goal of any eCommerce business should be to improve the customer experience. Shoppers are not going to come back if they have a poor shopping experience. You can build stronger relationships with them by improving the fulfillment rate, speed and accuracy, which is what you get with a fulfillment company.

2-day deliveries, timely updates, accurate order fulfillment and a better shopping experience, all these elements work together to drive up brand loyalty.