Back in December I’d started a series called the Importance of Product Identification. In January, I published the second part. Those two posts should be read before this one so you may want to go back and review those before reading today’s post.
Fulfillment centers are an industry that can be described as third party logistics or third party fulfillment. FCs provide the services of storing your inventory and shipping your merchandise. They usually have humongous warehouses and several clients. They usually charge you for two things, the space your goods occupy and the number of orders they ship for you. How they charge is as varied as the many companies and there are no standards. Some charge per square foot, some charge per pallet of space. Some charge per order for fulfillment and some charge per item and per order. You might pay (an example) $60 per 100 square fee of space, and $2.50 per order plus $0.25 each additional item. Whatever.
Fulfillment centers are located all over the country but are usually in very industrial locations where there are lots of warehouses, loading docks, freeways, interstates, airports or shipping ports. They are usually strategically logistically accessible by transportation companies.
So why would anyone want to use the services of a fulfillment center? It’s because you have other things to do than to pack and ship orders and it might not be feasible for you to rent your own space and hire part or full time employees for that task. Me personally, my intellectual capital is more valuable than my physical labor thus I am well served by outsourcing that aspect of my business so I can focus on other things. Some people are in a position to hire people but in my case, I don’t want the financial responsibility for the mandatory insurance required in California.
Above all, I don’t want to get into an argument about why you should or should not outsource fulfillment. The main reason for this is because a pet peeve of mine is people who run a business (usually with employees) who are grounded in their belief that you have to do everything under your roof because other people screw up. They usually push their beliefs upon others, not realizing that some people really don’t have many options, or don’t want to exercise them.
I have a short list of people, or types of operations who should consider outsourcing fulfillment. This is not an all inclusive list but lists a few of the reasons I believe in fulfillment centers:
- You are in an area where space is expensive or scarce
- You don’t want to hire employees to ship your items because you would have to bear the burden of employment related taxes and legal responsibilities and only need part time help. And you don’t believe in having people get paid “under the table” and breaking the law.
- You spend so much time packing and shipping that you are unable to focus on strategic aspects of your business.
- You ship more than 100-150 orders per month
- And most importantly, you sell to department stores.
Now let’s look at each one of these individually:
You are in an area where space is expensive or scarce
I think this one is pretty easy, a lot of DEs work from home or from small studio space. Typically expanding means getting into commercial space, and the associated leases. In many areas, decent space is hard to find or prohibitively expensive. Particularly if you sell bulky items.
You don’t want to hire employees to ship your items
Hey, I know plenty of people who can get a local college student to come by three days a week and pack and ship items for $10 an hour. Great, if that works for you. Even better if they are reliable and actually show up consistently. But not all of us can do that. Not to mention that in many instances, hiring somebody to come in necessitates the move to commercial space because it’s extremely tricky having someone in your home, unless you’re related or are good friends.
In many states the cost of legitimately hiring someone is so burdensome that it’s often not worth the hassle for small businesses. In addition, I find that DEs have an interesting dilemma: it’s hard to find and keep quality people working for you, who are not working for you to learn the business, until you get to a certain size. One reason is that many people glamorize the fashion industry and become quickly disenchanted when they realize just how nitty gritty it is. Often employees get bored when the business is very small.
You spend so much time packing and shipping that you are unable to focus on strategic aspects of your business
This is a good one. Oh this is a good one. My general rule of thumb (and I am not the originator of this idea) is: sell your strengths, hire your weaknesses. I take that a little further and say that you have to understand the value of your intellectual capital. If you are good at product development and marketing, that is something that is relatively expensive and strategically disadvantageous to hire out. Therefore, this should be what you do. Shipping, on the other hand, is relatively inexpensive and easy to hire out, thus, you should not spend so much time packing orders, that you cannot work on the “business side” of your business.
You ship more than 100-150 orders per month (most places won’t take you if you’re shipping any less) Some places don’t have a minimum. It’s generally not cost effective to outsource fulfillment if you’re shipping fewer than 100 orders per month.
You sell to department stores.
There are fulfillment centers that specialize in distribution of apparel to department stores. They usually get certified by the major stores having invested tons of money in becoming EDI compliant with all of their systems. They usually know all the requirements of shipping certain types of merchandise to each and every department store and what their specs are. They also usually specialize in reducing a company’s inbound chargeback rate.
I have met many DEs who sell to department stores and get hosed on chargebacks because they do not have the technological or mechanical capability to become compliant with the standards. These are the companies that should consider outsourcing, even if only that portion, their shipping to a fulfillment center because the cost savings should offset some of the expense of having third party fulfillment.
I think the hardest part -when you’re small- is the scary feeling of letting something go and not having complete control. I have two things to say about this: 1, fulfillment is not rocket science and 2, companies that provide fulfillment usually have a strong competency in that area and can often actually do a better job than you (yes, that is possible). Some of the things they often have that you may not are:
- Better inventory management software
- Better inventory storage and warehousing schemes
- Barcoding and scanning of inventory (I have met a few of DEs who wish they could implement this feature but don’t exactly have the budget for it)
- More space, to have a more efficient layout, and dedicated shipping space
- Shipping discounts with FedEx, UPS and DHL, that most companies do not have, unless they do large volume or have large association discounts
- Integrated order management/shipping software (by that I mean some DEs are copying/pasting shipping information into their program, thus taking longer to prep a package for shipping)
- Routine pickups from the couriers, at a time that is convenient to their business, not having to deal with a 2PM UPS pickup when they ship until 5PM.
In addition, most fulfillment services have electronic integration with shopping cart software, and order management programs, to make settling transactions, and providing tracking numbers to customers, much easier.