Fulfillment centers pt.1

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.

Related:
Fulfillment centers pt.2
Selling to department stores pt.1

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16 comments

  1. Christy B. says:

    As a former “assistant designer” for a DE, I can say that outsourcing your shipping could be a great thing. I spent many days packing and shipping orders while doing all my other tasks and it really eats up your time. Shipping became difficult when it overlapped with the next season’s samples and going to market. FCs seem like a great thing once your business has grown enough.

  2. vickib says:

    As a DE who is also a retail shop owner, one of the things that I value the most is being able to get the merchandise on the store floor fast. Nothing sells in the back room and the longer it takes to prepare it for sale the longer it takes to make the sale. This doesn’t help the DE or Shopowner or the customer.
    vickib

  3. Beverly says:

    Our mail-order supply division used a FC for 6 years. They stored our merchandise, manned (wo-manned?) the order lines, picked, packed and shipped the goods and deposited the money into my account. (Gosh, I loved watching that money magically appear in my account on-line!)
    I did not have to deal with that “business” side of the business at all. Their service left me free to do the things I do well, and since I would rather stick needles in my eyes (a la Jack Nicholson) than do invoicing, that worked rather well for both of us. They did their thing without interference from “the boss” and I could concentrate on marketing, sourcing and production. They sent me an inventory update every Friday, so I could see what things had to be re-ordered. For their services, they charged 10% percentage of all goods sold. They included our catalogue in every box going out. If they sent out a catalogue (but no goods), they would charge a flat fee (.85) in addition to the postage, for “capturing” the customer information. Fair enough.
    One thing you mentioned was the shipping contracts that FC’s are likely to have. They usually have access to more than one carrier, so you reap the benefits of having multiple shipping options. Also, because a FC is dedicated to invoicing and shipping, they usually can get things out the same day. Their system is all set up to handle quick turn-around. Being able to advertise “same day shipping” is a HUGE plus.
    Most FC’s also do mass mailings, so you can send out a mailer to your 6,000 customers (you wish!) without having to lick one stamp yourself. One thing that the owner of the FC I was with told me, “It’s easier to farm the customers you already have, than to attract new ones” I never forgot that, and on a regular basis, we would do up a new catalogue, and send it out to the whole mailing list. Amazing, how many orders would come in from mailing out a new catalogue!
    The FC that I used had at least 8 other big name clients, like Bell, Lexus and Sprint (they did all their mailings) so if considering a FC, you might want to ask who some of their clients are.

  4. christy fisher says:

    I’ve never done volume that warrants that kind of service, but it does sound wonderful!
    I have seen the ads for some of these operations and I am curious to a couple of things:
    1. I assume that your contractor(s) ship directly to the pick and pack operation..am I right with that? If so, are all tags, hangers, etc. done at the contractor or at the shipping center?
    2. Do they also have a quality control operation at the shipper, or is final quality control at the contractor? If at the shipper, who is responsible for damaged goods? (ie, if goods are damaged in transit from the contractor to the shipper..or if goods are soiled or damaged when tagging, etc. at the shipper?

  5. Miracle says:

    If so, are all tags, hangers, etc. done at the contractor or at the shipping center?

    I don’t know if this comes up in a later part (there are at least 3 or 4 parts to the series), but what you do where really depends on how you wnat to do it. Personally, if I were hanging, I would rather have the contractor hang and bag the items.

    If I only had brand tags, then I’d have the contractor do that, just to keep garment handling to a minimum. But if I were barcoding and tagging, I’d rather have the FC do that. Simply because many contractors are low tech and don’t have the barcode technology, thus you would be supplying everything and would have to count out the labels/tags for them. Whereas FCs have barcoding technology and can print on demand.

    Do they also have a quality control operation at the shipper, or is final quality control at the contractor?

    It depends on the set up, and that’s a client-specific thing that you set up. I know one FC, a client would tell them what percentage of goods to inspect. It is never all, but more like 4 or 5%. They would inspect a randon 4%, measure against spec, to check the quality of the shipment. Checking every piece is something that the contractor should do becuase they usually have the equipment to fix repairable issues. If you check it at the FC, then they have to unwrap/bag the item and handle it again, and they can’t fix anything so having them inspect all items is a waste.

    And mostly only FCs that specialize in apparel have rehab services, sewing, repairs, things like that. So it’s easier to do the bulk of stuff with the contractor.

    goods are damaged in transit from the contractor to the shipper

    That’s always a claim taken up with the shipper, regardless of where the goods are going.

  6. christy fisher says:

    Thanks.
    On the goods damaged in transit: I understand that you take a claim up with the shipper.. but if only 4-5% are inspected at the FC, then how would they even know if an item is damaged when they received it- until it was unpacked at the store and then who would have to take responsibility for that?
    (a stain, a tear, etc.)
    ..I was curious because I just saw a report on “short shipped” goods the other night and I was wondering if the FC checked each item piece by piece as they inventory it in, or if they just “unpack and hang in bulk” as received from the contractor..
    I’m sure it varies from setup to setup, but if you know, that would be my question.

  7. Miracle says:

    On the goods damaged in transit: I understand that you take a claim up with the shipper.. but if only 4-5% are inspected at the FC, then how would they even know if an item is damaged when they received it

    Usually goods damaged in transit are visibly damaged. You’re primarily talking about merchandise that is sealed or polybagged, so transit damage is usually water damage, broken cartons, etcetera. Unless you’re talking about transit from China in a container, which is susceptible to more types of damage. But it’s not like a seam breaks during shipment from the contractor to the FC via UPS, that’s a defect.

  8. Dana Madlem says:

    There is certainly a lot of merit to utilizing a fulfillment center. While many people assume FCs are automated robots or cavernous warehouses, the issue of damaged item lends evidence to the contrary. Many FCs offer customized solutions to handle many unforeseen hiccups in your business model. In fact, some FCs will handle very specific instructions.

    In addition, it is sometimes useful to live / work somewhere near your FC. You never know when you may want to stop by to inspect your inventory, especially if damages and/or imperfections become a problem.

    While 100 to 150 orders per month is a good target, some FCs (like the one I work for), do not always require a minimum.

    If you are interested in learning more about how FCs can help your business, feel free to contact me (800-522-5939). I am the Business Development Manager for a fulfillment center by the name of Rush Order, Inc. (www.rushorder.com)

  9. Miracle says:

    In addition, it is sometimes useful to live / work somewhere near your FC. You never know when you may want to stop by to inspect your inventory, especially if damages and/or imperfections become a problem.

    I agree entirely, and this is an issue I bring up in a later segment.

  10. big Irv says:

    “If so, are all tags, hangers, etc. done at the contractor or at the shipping center? ”

    You can do it either way, although most centres we send goods to will charge for this service of affixing any additional tags, stickers,
    barcoding etc… so it alot cheaper to do it at the contractors. Most contractors or package suppliers do this as part of their manufacturing service. Quality control is always an issue too, and we minimize claims by sending a TOP sample to the customer which should be retained as a reference should any issues arise. These samples confirm size, workmanship, labelling, tagging etc.. In some cases a full size set or Jump set are provided. It is always advisable to clarify with your carrier if the goods are covered under insurance. Don’t always assume the trucking firm has coverage, as not all do.

    Personally,I like FC’s. They are specialists in what they do, and if you think you might save some money doing it yourself, look at all the hard and hidden costs you will incur.
    btw, I have heard that some FC’s are so busy doing “rehab” on shoddy container loads from overseas, that is now it’s own little side industry. Is this true ?

  11. Miracle says:

    I have heard that some FC’s are so busy doing “rehab” on shoddy container loads from overseas, that is now it’s own little side industry. Is this true ?

    Yes, it is true. The FC I was with before performed a lot of rehab for a particular client. Eventually that client decided to seek out a different overseas contractor, which brought the irregulars down to a reasonable level.

    But the “rehab” industry is also popular becuase a large portion of goods are being relabeled, for private label clients, and are being completely repackaged/re-tagged to meet specs for different department stores. In one case, I know of a rehab service that was swapping out some trims (buttons, etc) to use “higher end” trims for a particular store the manufacturer was shipping to.

    Sometimes it’s easier, at that volume, to send to a rehab service then to a FC, becuase the rehab service may have a stronger competency at that, as it is all they do. Whereas, the FC might only have a few people trained to do rehab.

    Many FCs in the US with rehab services have spun them off into separate divisions as there are plenty of companies who want rehab but no fulfillment.

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