If you have a good product and can sell it online, one of the first decisions you have to make is regarding whether you are going to outsource fulfillment. I want to talk about that decision today and give you some thoughts from my years in that industry.
Like any other similar business decision, it is prudent to start by asking yourself what your company is good at and what it is capable of. If your focus is on making a great product, it is quite possible that fulfilling your own orders will just be a distraction. However, there are other things to think about as well:
- Doing fulfillment well is not easy. It is a complex business with lots of moving parts. The upfront investment in time and money to set it up is significant.
- You will have to either reallocate employees or hire new ones.
- You will have to reallocate or add warehouse space. Typically, that means creating a new picking area where employees can quickly pick individual items. In other words, if you only have high pallet rack in your warehouse now, you are probably going to need some space with 6′ shelves and bins. You will also have to set up a QA and shipping area.
- Doing fulfillment on a small scale will probably prevent you from receiving the shipping discounts that large fulfillment companies can offer.
- Seasonal sales and other variables may create scalability problems. You might handle 10 orders a day well but what will you do if you suddenly get 1,000 orders in a day?
- In an age where customers expect extremely fast and reliable shipping, doing your own fulfillment may require you to change your work schedule and culture to accommodate their demands.
These concerns are all legitimate. Don’t fall into the trap of downplaying them and thinking you can easily do your own fulfillment as a hobby. If you are going to pull fulfillment off well, you are going to have to pay a lot of attention to it.
On the flip side, outsourcing fulfillment has its own set of challenges as well:
- You will probably pay more to fulfill an order. As you might expect, a fulfillment center probably is targeting a 50% gross margin. Consequently, if your systems are efficient, you can probably fulfill your orders at roughly half the cost of an outsourced solution. Fulfillment centers have all kinds of fees that really add up. Remember that it costs you to ship inventory to the fulfillment center and once there, you pay them to receive/sort your inventory, store it, and pick your orders.
- No one watches your inventory like you and your employees. As soon as you start shipping inventory to a typical fulfillment warehouse, they will start damaging it and losing it. That is just the sad truth and it happens almost like clockwork. You give up a lot of control of your inventory and you have to stay on top of this kind of shrinkage.
- You give up control over an important touchpoint. You lose the ability to give your shipments the loving care that makes a difference. You may lose the ability to do inserts and other things to help retain customers. Fulfillment centers are about volume… period.
I do not want to paint a completely bleak picture so let me tell you the other side of the story. Outsourcing fulfillment may actually save you a great deal of money in the long run on the shipping discounts alone. Also, typically, they are located in parts of the US where they can deliver quicker than you may be able to. And of course, when you push fulfillment off your plate to a good company, you are freeing up your time and resources to focus on other things you do better. There is a lot to be said for that.
In coming articles, I will discuss how to set up your own fulfillment and I will also talk about the Amazon fulfillment solution in particular since it is one of the more popular outsourcing options available to you.
In the meantime, there are lots of variables that might impact what fulfillment decision you should make. If you want to talk about it, contact me.