More than 1 million new sellers have joined Amazon this year. Pushing the number of Amazon sellers to over 5 million. Amazon has turned launching a business, which used to take retailers years of planning, into a process that can have an Amazon seller listed and making sales in less than a month. It should be no surprise that the number of new, first-time retailers in the U.S. is higher than ever.
As many new merchants grow and learn about pricing strategies and profit margins, the question eventually arises, how should I fulfill my orders?
Fulfillment Options in the Modern Era
Retailers have two options for fulfillment: fulfill internally or fulfill externally.
Internal or in-house fulfillment is when the retailer owns the process, and the associated costs, of the logistics operations. This can look like a brand buying or renting out a warehouse space, purchasing conveyors and sortation devices, and employing workers to pick, pack, and ship their product. This can also look as informal as an operation being run out of a kitchen, living room, garage, or basement.
External or outsourced fulfillment is when a merchant employs a third-party company to own the process of fulfilling daily orders. Most retailers use what is called a Third-Party Logistics company, or 3PL. 3PLs provide warehouse space for multiple brands to store their product and take on the burden of labor to pick and ship orders.
When It Makes Sense to Fulfill Orders Internally:
Typically businesses that are either very small or very large do fulfillment internally. A start-up business with less than five orders per day may find the cost associated with outsourcing fulfillment doesn’t make sense with their current volume. Not to mention, many Third Party Logistics companies have a minimum of at least 1,000 orders.
Note: Jay Group is a start-up friendly 3PL. Talk to a specialist about our Start-up Support Solutions.
On the other hand, companies like Nike and Heineken who do thousands of orders per day find that owning the cost of renting a warehouse and employing labor is less expensive than outsourcing it.
Signs to fulfill internally:
1. Order volume is too low
As previously mentioned, if sales volume isn’t large enough, the amount a business pays for storage will be greater than the amount they receive in sales. If the time it takes to fulfill orders does not detract from other business growth initiatives, it may make more sense for an entrepreneur to fulfill themselves.
2. Order volume is too high
If sales volume is high enough, a business may find that renting a warehouse and designing an operation built around it’s products saves the brand money rather than conforming to a standardized operation shared by many businesses and products.
3. Customization is required on every order
If a product requires unique packaging or the product itself is customized on every order, there’s a chance that a 3PL cannot handle that level of customized detail or will end up charging a business hefty fees.
When It Makes Sense to Outsource Fulfillment:
Bigger than a startup but smaller than a Nike? At this stage in a company’s life, a residential house is no longer big enough to complete orders by hand, but the volume is not large enough to justify the cost of renting a warehouse, employing labor, buying shipping supplies, and taking on other associated costs.
A 3PL can be ideal in this situation. When using a 3PL, the cost burden associated with owning and operating a warehouse is dispersed among many retailers. This allows the 3PL to offer each a lower than normal rate due to the economies of scale. Similarly, since a 3PL is shipping for a multitude of retailers, they can negotiate transportation rates much lower than a single retailer can.
Signs it’s time to outsource fulfillment:
1. Marketing and other growth initiatives are taking a back seat
Every entrepreneur knows that they can’t just put up a website and begin driving sales. Building brand awareness and standing out from the competition is a continual process. Don’t let fulfillment slow your brand’s growth path.
2. Seasonal or uneven sales volume
While revenue may be seasonal, the fixed expenses of owning a warehouse are not. By outsourcing to a 3PL, brands can turn these fixed costs into variable costs, and end up improving their margins more than they may think.
3. Storage space is disappearing; managing SKUs and inventory is difficult
These are signs that a business is outgrowing its current infrastructure. Its either time to invest in a bigger warehouse and update the warehouse technology, or if those investments are too much for your current business, it’s time to outsource your fulfillment.
4. Growth plans include expanding internationally
Shipping in the U.S. is one thing. Shipping internationally includes customs, tariffs, expensive international fees and other complex factors. By using a 3PL, a business can dip it’s toes in a new marketplace to set for demand without fully committing to the risk of opening a warehouse abroad.
5. Slow shipping times and delays cost sales
If a business is in Florida, shipping to Oregon either has long transit times or an expensive shipping price tag associated with it. 3PL, due to their volume, can provide better shipping rates and are typically strategically located next to major shipping hubs to reduce time in transit.
Internal Fulfillment Vs. Outsourcing: The Tipping Point
At the end of the day, what makes sense for any business always comes down to cost and quality. If the cost of fulfillment is less expensive and will give a better brand experience when using a 3PL versus doing it internally, it’s probably time to change.
Below is an example fulfillment cost per order analysis.
*Don’t forget to include employee’s time in this equation. When outsourcing fulfillment, this frees up the time of company employees to handle other tasks like marketing, brand strategy, and new product creation.
Fulfillment is a necessary part of retailers’ supply chains. As startups scale, it’s important to keep a close eye on fulfillment fees. When the volume makes sense, outsourcing to a 3PL can free up profit margin that can be reinvested back into the business, not to mention free up entrepreneur’s time to focus on revenue-generating activities.
LEARN MORE: Getting close to the tipping point? Reach out to our fulfillment specialists to help walk you through your fulfillment costs and see if a 3PL makes sense for your business. Request a free consultation today.