For our e-commerce business, shipping and fulfillment is an automated process. When an order is placed by a customer on any of our websites – wholesale or retail – it is fulfilled by our warehouse partner without any action required on our part. This means we could take a day, week or month off and the business would keep generating and fulfilling sales. Even the process of passing those sales on to our accounting system is automated.
In the beginning, most indie brands start by handling this aspect of the business themselves. You store the products in your garage or a corner of your office, buy some boxes and start stuffing and mailing them as the sales roll in. However, successful companies adhere to the principle of outsourcing any services that are not a core competency. While there are some advantages to fulfilling in the early stages of your growth, scaling up your fulfillment activities as you grow may eventually become impractical. Wherever stage you are at, you should question if and when it might be time to hand off this aspect of your business to a qualified partner.
In this post, I cover the pros and cons of outsourcing shipping and fulfillment so that you can decide whether which is best for you in your current phase.
Advantages of handling shipping and fulfillment yourself
Ability to create a great unboxing experience
Handling fulfillment yourself allows you to add personal touches that can differentiate your brand with a unique unboxing experience which may be too costly, labor intensive or impractical to efficiently outsource to a third party.
Flexibility in shipping options
Fulfilling yourself allows you to make on the fly adjustments to your shipping methods to meet the specific needs of an individual purchaser and realize the greatest cost/efficiency benefit in each case.
Inventory monitoring
Since you are storing inventory on-site, you can keep a close eye on your inventory numbers. When dealing with a third party you will need to integrate your website with their systems – which may include additional costs – and you will be entirely dependent on the accuracy of their systems.
Reduced Costs
The main reason early stage companies handle fulfillment in-house is the cost savings. The main costs associated with a third party warehouse are storage and pick and pack (ie a per order charge). However, there are a host of other charges that can drive up expenses including receiving costs, software integration costs and the cost of doing an inventory count.
Advantages of Outsourcing Fulfillment
Focus on core business
The future of your business will depend on your ability to market and sell your products, as well as generate new product ideas. Fulfillment, while essential, is largely a routine task that can be automated and outsourced. Handling it yourself generally does not provide a competitive advantage. In fact, it is more likely to distract you from your core objectives and pull you away from time spent on value-adding activities.
Increased Efficiencies
A warehouse only does 1 thing: store and ship merchandise. This presumably allows it to realize higher service and cost efficiencies that come with specialization. For instance, it may be cheaper to use a third party fulfillment warehouse than rent additional space for an in-house fulfillment office. Also, the warehouse may enjoy special courier rates because of the volume they generate that they can pass on to your business. Finally, you must consider the opportunity cost of the time you or an employee is spending filling orders against the cost of having a warehouse handle it for you.
Proximity to foreign markets
If you are selling in a foreign market, you may realize significant cost savings by setting up a warehouse there. In addition to savings on shipping costs, import/export regulations may make setting up a regional warehouse the only practical solution for dealing with duties. For instance, while our e-commerce business is a Canadain company and the USA and Canada have a free trade agreement, it only covers goods manufactured in Canada. Because our goods are manufactured overseas USA customers would have to pay duty on every order we shipped from Canada to the USA. Instead, we pay duty once when we import our goods to our USA warehouse and ship to our USA customers from there. (we have a separate warehouse for Canadian customers, though initially we fulfilled Canadian orders ourselves)
Practical Considerations: How to pick a good warehouse and fulfillment partner.
Choosing a fulfillment partner is a big decision. Your warehouse will fulfill a critical role in your business, so making the wrong choice, while not irreversible, can be very costly. Here is a checklist of questions and items to discuss with any potential warehouses. Be sure also to get references.
Shipping provider options and rates
- Can you use your own couriers and rates?
- What couriers do they work with and what are their rates?
- Get some sample shipping rates based on previous orders
Software integration options
- Do they have an API built that integrates their system with your e-commerce software?
- Does receiving an order from you require a manual process?
- How will you manage inventory after integration?
- Are there additional costs associated with setting up and maintaining a connection to their internal system
Pricing model per order
- Get an exact breakdown of the pick and pack charges involved in fulfilling a single order (usually there is a base charge + additional items but models may vary)
- Run a few recent orders by them to see what they would cost
Proximity to ports or factories
- Consider the cost of shipping from your factory
- If shipping from overseas, determine which port is closest and what the total shipping cost would be including any port charges and shipping from the port.
Setup costs
- Is there a cost to get set up in their system?
- Are there any technology costs you will have to shoulder to become compatible?
Receiving costs
- What are the costs for receiving new merchandise into the warehouse?
- What are the costs for bulk shipments or inventory transfers?
Cost for Inventory Counts
- What is the charge for manual inventory counts?
Terms and Conditions
- Are you required to sign a contract for a specific period of time?
- What are their payment terms?
- Who is responsible for lost or damaged merchandise? How will this be tracked?
Have any other thoughts on the pros and cons of outsourcing shipping and fulfillment? What’s your experience been? Leave a comment below…