Shipwire’s guide to outsourcing order fulfillment
This guide discusses the implications of outsourcing order fulfillment and criteria for choosing a partner. Shipwire provides order fulfillment services in the U.S., Canada, the UK and China; however, this guide is intended to be a helpful overview regardless of whether you choose Shipwire for your fulfillment or another provider.
Topics that this guide will cover:
What is Outsourced Order Fulfillment?
If you sell goods to buyers over the Internet, the process of storing the product in the warehouse for selection upon purchase by an end-buyer, packaging it for shipping, labeling it and finally shipping the product is called “order fulfillment”. As your business grows you may find that this process becomes incredibly time consuming distracting when you want to focus on growing sales. That is where outsourced order fulfillment services start to look compelling.
In a nutshell, outsourced order fulfillment is defined as storing your inventory in a third-party warehouse (3PL or third-party logistics) where you route your orders for processing. This outsourced fulfillment provider will take your order and pick, pack and ship the order to your customers in a way that you define.
Other elements come into play when you want to make order fulfillment as cost-effective as possible. For example, geographically optimizing your inventory placement to lower shipping costs and fulfilling international orders.
Are You Ready to Outsource Fulfillment?
You may be asking yourself, “When is the right time to outsource my order fulfillment?” If you are asking yourself that question, the time is likely upon you. Here are some other factors to consider:
- Your level of experience – Do you know how to get a product from point A to point B the fastest method, for the lowest price with the least margin of error? Do you want to spend your time in a warehouse or garage packaging and shipping your products? Can you integrate your Web store or shopping cart with your warehouse or order fulfillment solution to automate your business?
- Business Growth Plans -If you believe that your business will grow, you need to ask yourself some key questions. Will increasing business mean you will need to add additional warehouse space? Will my current staffing be able to handle additional growth? Will I still be able to focus on growing sales if I win a few big accounts? If future sales look good, outsourcing your order fulfillment lays the infrastructure for your business growth.
- Order Volume – Maybe your future sales pipeline is normal; but, you are just having trouble keeping up. This is a good time to start looking at order fulfillment which can scale better as you grow your business.
- Eliminate Shipping errors - One of the laws of do-it-yourself order fulfillment is that “as shipping volume goes up, error rates go up”. Employees and family get stressed, people are working late, WMS (warehouse management solutions) designed for lower volume start to break down…generally, mistakes happen more often. Mistakes cost your business big: Angry customers, expensive returns shipping, restocking times, reshipping costs and general hassles. A good rule of thumb is that each error cost you 3-4 times whatever your per order pick-pack-ship cost; assuming you can retain the customer.
- Product Type – Not all products are right for order fulfillment. If you are shipping handmade items that you make on demand, items that need customization like monogramming or wedding invitations, individual (1-off) items like closeouts and antiques or some perishables then order fulfillment will likely not work for you. Outsourced order fulfillment is best for non-perishable items that you buy by the lot, pallet or container and sell by the hundreds. Easily repeatable items like toys, electronics and apparel.
- End Buyer- Who you are selling to will make a big difference in what your order fulfillment needs are. Consumer shipments verse direct ship, drop ship, wholesale, distributor, retailers (big box retailers). Also consider where your customers are located around the world (see below regarding the power of multiple warehouses).
- Inventory Complexity – A Stock Keeping Unit (SKU) is an individual type of product. If you sell a black t-shirt in S, M & L that is 3 SKU’s. If you sell the same shirt in 1, 2 & 3 packs with all sizes that is now 9 SKU’s. The general rule is that the more SKU’s you are carrying the more complex (and expensive) your order fulfillment can get. The reason for this is that many warehouses will put individual items in bins in a forward pick-pack area to make it easy to pull orders. A good general rule of thumb if you have a lot of SKU’s is look to outsource the fulfillment for the high-turnover (“best sellers”) first.
- Receiving Needs – Receiving is what the warehouse does when you send it your product in bulk, freight or by the container. You tell the warehouse what is arriving via an Advanced Shipping Notice (ASN) and packing list – this tells the warehouse the product characteristics and number of each SKU that is arriving. To ensure accurate receiving make sure that items are labeled with the appropriate SKU’s (or make advance plans with the warehouse for labeling upon receipt); ensure your manufacturer or shipper has an accurate packing list and communicate all details to the warehouse. Whenever possible give the warehouse the tracking information for your inbound inventory ; the larger the receiving the more important these items are. If you buy wholesale lots and don’t know what your receiving make sure your fulfillment solution can handle a “blind receiving” where they tell you what you got based on a review of inventory according to the packing list.
- Customer Support – Customers expect superb CRM (Customer Relationship Management/Messaging) of order status, shipping status and tracking numbers. Customers expect the right order shipped at the time that they expected. They want to be able to return items they find unsatisfactory. When it comes to supporting international customers all those rule apply and you need to understand the tax and customs consequences of how you ship. Outsourcing can give you all this without major investments.
- Automation & Order Status Notifications- The key to scalability and error elimination is automation. This is hard for the actual packaging and shipping; however, this is eminently achievable when it comes to sending orders to the warehouse and getting ship confirmation and tracking numbers back. See our Compatible Ecommerce Carts page for a list of solutions automated with Shipwire.
- Tax considerations – Most countries that you may want to import inventory into will require you to put your local tax ID on inbound imports. This is usually quite easy to get. See our UK Warehouse Guide for an example of where to get this Tax ID in the UK or get a US Import Tax ID.
- International Shipping – We are going to cover this a lot more below. Successfully shipping international orders is a skill; doing it cost effectively is a process that requires you to think like a Fortune 500 business. Move inventory in bulk (by freight) into foreign markets like Canada and the UK. Once you have inventory you can ship local ground parcel services with 1-2 day delivery times, just like merchants in that country. Shipwire can help you do this.
- Retail Compliance – Retailers like Target®, Walmart®, Sears®, and chains like The Men’s Warehouse® require suppliers to offer EDI (Electronic Data Interchange) between your order fulfillment solution and their supplier software. EDI/Retail Compliance gets very complex and can be expensive to integrate. It is very common for an entrepreneur to get a 40-60 page document from a retailer that wants to sell your product. Consider whether you want to absorb the cost of compliance or partner with a company that does this.
- “Single Neck to Choke” – If you are tired of trying to get claims out of the parcel carriers, handling employee staffing issues, finding the lowest shipping rate and handling hundreds of shipments you may be ready to outsource fulfillment and push the reliability for shipping perfection to a provider like Shipwire. We call it the “Single neck to choke” when something goes wrong.
Fast and accurate order fulfillment is a requirement to compete in today’s domestic and international ecommerce. If you have concerns or can see the writing on the wall that you are not going to scale – partner with an expert like Shipwire and negotiate a cost that works for your business. Failing to be an expert in order fulfillment means that you will lose sales and anger customers. This is especially true of rapidly growing ecommerce businesses.
What are the Pros and Cons of Outsourcing Fulfillment?
When considering whether you are ready to outsource your order fulfillment it is helpful to know some “Pros & Cons”.
Pros: Outsourced Order Fulfillment Benefits
- Scale your order fulfillment to match your growth.
- Lower cost shipping. Most fulfillment solutions have greater shipping volume and can negotiate better rates with the carriers.
- Outsourced order fulfillment is usually less expensive than doing-it-yourself or running your own warehouse.
- No more hassles with warehouse employees.
- Automate your order handling between your shopping cart and your warehouse.
- Get reporting and tracking of all shipments.
- Automate claims handling. Shipwire offers 1-click claims submission.
- Better understanding of your shipping and fulfillment costs without having to invest in warehouse leases (build outs), employees, software, vehicles, insurance, security, etc.
- More distribution center locations = lower shipping costs.
- Eliminates the hassle of storage and shipping. Whether you are out getting new business or relaxing at the beach, automation means it works without you having to pack and ship every order.
- Frees you up to grow your business and focus on sales and marketing.
- Automate returns handling (even Internationally).
- Allows you to enter new foreign markets with minimal investment.
- Gives you a point-of-contact for all storage and shipping concerns.
- Automate returns processing.
- Freight desk to help you iron out complexities in your supply chain.
By outsourcing you get an expert partner to help you grow your business and who is responsible for your customers receiving orders on a timely and cost effective basis.
Cons: Outsourced Order Fulfillment Hurdles And How to Overcome Them
- Inventory is off-site and you are giving up some control. If you like to wake up in the morning and watch your inventory while you have coffee you may have some concerns moving your inventory to a fulfillment outsourcing service. Consider only outsourcing 20% of your inventory and orders. Alternatively, make the jump internationally, move 20% of your inventory to Canada or the UK (a location where you have existing order volume) and test outsourcing while testing a new market.
- Cost. There is a cost to outsource order fulfillment. When comparing a quote for outsourced order fulfillment to doing-it-yourself make sure you compare apples-to-apples. Don’t tell yourself you don’t have employee staffing costs if you pack and ship your own orders. Assign a reasonable hourly cost for your own labor.
- You must be conscious of your receiving and packaging. Outsourcing means that you are relying on a third-party that needs clear communication from you regarding your inventory details, when it is coming and how you want it handled. You will need to be conscious to clearly communicate your needs and get agreement from the warehouse (aka, kitted, labeled with hang tags, repackaged, etc). You will need to do this on your first receiving and on your hundredth. This is so important that we have included a special section below on clearly packaging and labeling
By working with your chosen outsourced order fulfillment provider, most of these “Cons” can be overcome and likely turned into additional “Pros”.
The Power of Multiple Warehouses & A Global Warehouse Network
You can reduce shipping costs and order delivery times by locating inventory in multiple warehouses closer to end buyers and ship orders from the warehouse closest to the end buyer. For online e-tailers that are selling nationwide or globally, this is critical.
Outsourcing order fulfillment to a third-party should result in savings of time, headaches, order fulfillment costs and… shipping costs. Many order fulfillment providers will tout location as key to shipping price savings; and, they are right. However, don’t settle for one (1) good location; you need multiple locations that are geographically close to major population centers and your buyers.
Why multiple warehouses are better for your business
If you ship 25% of your orders to the West Coast of the U.S.A, 25% to the East Coast of the U.S.A., 25% to Canada and 25% to Europe it is very probable that most of your shipments will will go to major population centers where buyers are (LA, Chicago, New York, Toronto, London, Paris, etc). If your current warehouse is in Portland, then a warehouse in LA or Chicago will improve your delivery times to the East or West Coast compared to your Portland facility; however, it doesn’t make any sense to locate all your inventory in one of those locations. You outsourced and optimized for 25% of your orders if you are lucky.
A better solution would be to spread your inventory out into 5-6 warehouses in LA, Chicago, Toronto, Vancouver and the UK or mainland Europe. Move inventory globally using bulk freight shipments and local warehouse storage close to major population centers. As orders are received ship them out from the warehouse closest to the end-buyer. This results in lower parcel delivery costs, faster delivery times and true shipping cost savings. This is a play straight out of the Fortune 500 top online retailer game book.
Discover true shipping cost savings
Discovering real savings in your storage and shipping supply chain has been the same since the time of Alexander the Great — use the cheapest mode of transport for the longest distance, and discover ways to leverage “economies of scale”.
When you move product in bulk (freight/lot versus individual parcel), you get the greatest economies of scale and the lowest cost. When product inventory is moved in bulk from consolidation points (manufacturer and freight forwarding short-term storage), to distribution points (warehouses) it can be moved very cost effectively on a per-item basis. The most expensive part of retail fulfillment is the last leg of the products journey — from your warehouse to the end-buyer — that is typically a parcel shipment with a major carrier rather than freight.
Let’s look at a simple example of a 10-lb. parcel shipment from a New York City warehouse to a residence in Los Angeles. If your warehouse is in New York, your cost for a normal ground shipment to the residence in LA would be approximately $12.66 (Feb ’08 pricing, ground, with residence fee and fuel surcharges). If you need to get it there via next-day air it would be approximately $81.00. If you put some of your inventory in a warehouse in Los Angeles, your cost for that same package would be $8.39 (ground, with residence fee and fuel surcharges). If you had to get the product to the customer the next day, it would be the same $8.39 fee.
Multiple warehouses reduce costs
What is the lesson? Carrier pricing is a factor of distance. If you strategically place inventory in multiple locations, you can decrease delivery time and costs. Granted, in this example we saved a little over $4.00. However, if you”re doing 100 shipments a week you would be saving over $1,500 monthly just on shipping. You just saved roughly one-third of your shipping costs while increasing your service levels. This is a true cost savings…this is the power of multiple strategically located warehouses.
The objection we typically hear is, “I would have to pay to move my inventory to my second warehouse.” Bulk freight shipping, those 18-wheelers you always see on the interstate, is cheap compared to the outbound piecemeal parcel shipping of FedEx or UPS. An 18-wheeler filled with 10,000 stuffed animals will cost less than $5,000 to ship from NYC to LA, that’s $0.50 a stuffed animal, in return for $3.00, $5.00, or more in savings for each stuffed animal you would ship individually — not to mention your buyers get faster delivery times.
Therefore, the rule is to strategically place inventory closer to the end-buyer, and always try to shorten the last leg of the parcel delivery by the carriers. In industry jargon, this is sometimes known as “forward warehousing”; think of it as real savings. Alexander the Great actually invented the concept; he called it a “forward supply depot.” Whatever you call it, it means real savings to you.
International Shipping and Risk Mitigation
When you start to ship product internationally, it is important to be aware of the some of common pitfalls:
- International shipping rates that can exceed the order value
- Higher incidence of lost shipments
- Slow delivery times
- Buyers that decline shipments due to taxes, customs and duties
- Orders declined by customs, often due to inaccurate paperwork
- Additional carrier brokerage fees
- Higher incidence of fraud in countries with lax regulatory environments
- Expensive and untimely returns
The point here is not to scare you, but to makes sure you are aware of the challenges inherent in shipping cross-border. Shipwire’s sophisticated integration with carrier partners delivers the most accurate shipment cost and delivery time estimates possible. However this cost estimation does not include brokerage fees, taxes, customs or duties that may be imposed on your shipments, and delivery time estimates cannot anticipate unexpected delays imposed in customs processing. In addition, there are instances where customs may refuse to process orders, impose unanticipated customs or duties on International shipments at their discretion, or even in rare cases, lose product. Even perfectly documented shipments can be returned to the warehouse, without a stated reason. For all of these reasons, Shipwire can only offer cross-border shipping on a best-effort basis, with the understanding that:
Minimizing the Risks
Expand Into New Markets – International eCommerce Made Easy
Selling internationally It is not as hard as it sounds. Don’t be afraid to expand your online retail business overseas. In fact, in the global economy and international shopping, you are probably already seeing international buyers, so make it easier for them to buy from you.
(For clarity sake International means US merchants selling outside of the US; it also means a foreign company selling in the US.)
Are you ready to start selling International?
- The historically low dollar ($) is making US merchants think about selling overseas and motivating foreign buyers to buy from dollar ($) priced merchants.
- Are foreign buyers already finding your website and asking for you to ship to them?
- Do you want to expand your business into Canada, Europe or Asia?
What are you going to sell in international markets?
- B2C – are you going to sell direct to consumers through common marketplaces like eBay UK?
- B2B – are you going to sell to retailers or do you have distributors that you need to resupply?
- What products – If you have 1000′s of items (SKU’s) it may make sense to focus on your top selling items overseas. You likely have more inventory of these items and have a better defined sales and support process?
Is your Web site ready?
- Consider putting up a couple of foreign sales/product pages that focus just on the products you are selling overseas (rather than your whole catalog). This will tell international buyers that you are prepared to deal with their orders and focus buyers on the products you are ready to ship to them. If they want something different, make sure your contact us page is easy for them to find and be responsive
- Overseas payments don’t have to be difficult. Talk to your credit card processing company and see if they will allow you to accept foreign currency (understand additional fees). Try PayPal if you are just getting started.
International Order Fulfillment & International Shipping
- See our posting above about the benefit of a global warehouse network. Shipwire is designed to making overseas order fulfillment as simple as Store-Sell-Ship™. Move a portion of your inventory to Canada or the UK and cut your shipping costs.
- Shipwire ships to most countries from our US warehouses and we recommend low cost shipping methods in most cases. Tip: If you ship internationally, use trackable shipping and make sure your shipments are insured.
- If you are going to move inventory internationally please see our follow-up guides on getting Tax ID’s, calculating customs, using customs brokers. UK Order Fulfillment Guide.
- Call Shipwire and we’ll help answer questions and guide you to International success.
- Having multiple international warehouses will also help you deal with International returns at the lowest cost.
We are constantly updating this Guide. Please feel free to leave comments, suggestions or changes. You can also contact Shipwire to recommend a change or offer a suggestion.