The Rise of the E-commerce Fulfillment PartnerBusinesses were integrated, once upon a time. That is, many or most of the functions of business—product development, manufacturing, distribution, marketing, sales, etc.—were the responsibility of a single organization. More recently, new technologies have precipitated the unbundling and re-bundling of those functions into new businesses. What we call human scale business is one of those emergent forms:
- Highly focused products built upon empathetic relationship with customers
- Direct-to-consumer and multichannel sales enabled by e-commerce technologies
- Outsourced manufacturing
- Outsourced fulfillment and logistics
What 3PL Companies DoAt first blush, 3PL companies all seem to do pretty much the same thing:
- Store – they receive products from you or your manufacturing partner and store them in their warehouse(s) until an order is placed by one of your customers.
- Pick – they retrieve product from the warehouse as sales orders are received.
- Pack – products are packed in cartons for shipment.
- Ship – packed orders are placed with the appropriate parcel or freight company for delivery to the destination specified in the sales order.
When to Use a 3PLWhen starting something, “Flintstone first.” Do it yourself. Get to know your product fulfillment process by doing the job. Set up a visual inventory system in your spare bedroom. Figure out the points of friction during picking, packing, and shipping. Learn what materials and procedures cost the most—in money and time. Your hands-on experience will yield insight into your product and packaging design that is otherwise hard to get. It will also prepare you to determine which 3PL is right for you, your business, and your product. That’s because do-it-yourself doesn’t scale, and your time and talents are probably better directed elsewhere in the long run. That’s even truer in today’s environment of rising expectations. Companies like Amazon.com have trained us to expect timely, reliable, and inexpensive home delivery of just about every conceivable product. That sets the standard against which the rest of us are measured. The same holds true for the expectations of wholesale customers, as any manufacturer who has mispacked a pallet or missed a drop-shipment window can attest. Besides, how do you want to spend your time? Are you committed to building an operationally excellent system on your own? Is that really the best use of your energy? If the answer is no and you find yourself spending more and more time ordering shipping cartons from ULINE and fretting about getting to the UPS Store in time to make tonight’s pickup, you should start looking for a 3PL partner.
What to Look for in a Fulfillment PartnerThere are thousands of companies in the U.S. alone that offer one or more of the basic store/pick/pack/ship functions of a 3PL partner. From a distance, it’s hard to tell them apart, which is why it’s tempting to view 3PL as a commodity and focus on price to the exclusion of other considerations. In my experience, that’s a mistake.
Seek the Right FitIf you sell online to retail buyers, you understand how important it is to fulfill orders in a timely fashion. Two-day or overnight delivery have become standard. Consequently, it makes sense to seek a 3PL that specializes in e-commerce. Otherwise, they might not share your sense of urgency. Do they offer same-day fulfillment? If so, what is the order cut-off time? Equally, how quickly do they receive goods shipped by you to their warehouse and make your products available for order fulfillment? You can’t ship orders when your product is sitting on a pallet on the receiving dock. An e-commerce fulfillment specialist is also more likely to be willing to work with relatively small e-commerce companies. If you aren’t viewed as being a desirable customer of your partner, you are less likely to receive the service you want and expect at critical moments (e.g. around the Christmas or Chinese New Year holidays). As an e-commerce retailer, you’ll want your 3PL to integrate seamlessly with your shopping cart provider (e.g. WooCommerce, Shopify, BigCommerce, etc.). As a friend once said to me, “I don’t even want to see the sale unless it requires special care. Orders should normally go straight to the fulfillment center without requiring me to do anything.”
I don’t even want to see the sale, unless it requires special care. Orders should normally go straight to the fulfillment center without requiring me to do anything.If you sell expensive or particularly heavy products, seek 3PLs who can provide the security, inventory control, and shipping discounts you need. If you sell through multiple channels, find out whether the 3PL can integrate with your wholesale customers’ systems to accommodate retail replenishment shipments and drop-shipments according to requirements. Copying and pasting purchase order, sales order, and packing list data from one system to another is a life-sucking waste of time.
Warehouse ManagementAn otherwise empty room with some shelving and a shipping station consisting of a card table works fine during the early, Flintstone stage of your fulfillment process. Moving into a bigger version of essentially the same setup is insufficient as you grow. Look for evidence of professional warehouse management in order to ensure that all of your product reliably makes it into your customers’ hands in one piece:
- Security – is access to the warehouse restricted? Are there video monitoring systems in place?
- Backups – are there redundant power, internet, and other critical systems installed and functioning? Integrated systems aren’t worth much if the loss of power at your warehouse means that they can’t see, much less fulfill, your orders. Does the 3PL backup its data offsite?
- Geographic coverage – where is/are your 3PL partner’s warehouse(s) located? Can they deliver to your customer base within a maximum of two days using ground service? I live in Bozeman, Montana. It’s a beautiful place. It’s not a great location for a warehouse for products sold nationally.
- Carriers – does the 3PL have relationships with the appropriate package (e.g. FedEx and UPS) and freight (e.g. less-than-truckload/LTL) companies relative to your needs?
MinimumsA fulfillment center is the most profitable when it can perform a well-understood function in a predictable, repeatable manner. There are only so many surprises and exceptions a 3PL can handle. Some try to mitigate uncertainty by imposing a variety of minimums on their customers:
- Inventory – it’s tough to keep track of that single unit of that one rarely purchased SKU. So, some 3PLs will ask that you maintain a minimum quantity of each of your SKUs that it stores for you.
- Orders – most fulfillment service providers will seek evidence that you’ll do enough business with them to represent a satisfactory customer lifetime value. That’s often somewhere around 100 to 200 shipments per month. Fulfillment by Amazon is a bit of an outlier in this regard. It will be as granular as you like. Just don’t expect customization or personal attention.
- Contract duration – for similar reasons, some 3PLs will ask that you commit to an extended service contract. I would avoid these relationships, unless you’re really confident that a) the 3PL will perform as expected and b) your needs are well understood and aren’t expected to change materially during the term of the contract.
Reliable PerformanceWhat evidence does your prospective fulfillment partner offer regarding its performance over time? The value of lost sales, whatever the cause, can quickly wipe out any supposed storage and pick-and-pack savings.
- Inventory counts should be accurate.
- Orders should be picked accurately, packed accurately, and shipped on-time. Every time.
- What performance guarantee does the 3PL offer? Is the guarantee unambiguous, or does it contain a lot of fine print?
CostOh yes. Cost does matter, and fulfillment costs are significant for an e-commerce company. There is no shaking that fact. As economists are fond of pointing out, “There ain’t no free lunch.” By selling direct-to-consumer, you can earn a superior gross margin, but you are also responsible for the logistics and fulfillment functions that would otherwise be performed by a wholesale customer. FUNCTIONS OF A MARKETING CHANNEL Typical pricing consists of the following components:
- Intake or receiving fees – the cost of receiving your products packed in master carton or pallet quantities and placing them in the warehouse. According to a recent analysis prepared by FitSmallBusiness.com, you might expect intake fees to range from $15 to $35 per pallet.
- Storage fees – this is often expressed in terms of pallets or cubic feet per month. (A standard 48″ x 40″ pallet loaded 48″ high represents about 53 cubic feet.) Storage fees might range between $15 to $40 per month per pallet ($0.28 to $0.75 per cubic foot per month), though the cost of storage during peak season (i.e. October – December in the U.S.) can be considerably higher.
- Pick and pack fees – vary widely. They typically include the cost of shipping materials and may include shipping, which is the case with Fulfillment by Amazon. In any event, pick and pack fees might run between $1.50 and $3.00 per item.
- Shipping – 3PLs will use their aggregate shipping volumes to negotiate favorable rates with carriers. In many cases, fulfillment service providers will share the savings with you. Red Stag, for instance, makes a point of aggressively sharing savings on the shipment of heavy items.
Beware of False EconomyA well-functioning fulfillment system feels like a utility. That is, you don’t think about it unless something is broken. As with our power bill, fulfillment costs can become an outsized source of aggravation. Remember to weigh the cost of a high-performance fulfillment system against the alternatives:
- The opportunity cost of your time, attention, and emotional energy.
- The cost of goods lost or damaged during receiving, storage, or shipping.
- Higher customer service costs and returns.
- The cost of lost sales due to poor fulfillment execution.