Most small e-commerce and multichannel retail businesses fulfill their orders internally as the operation gets off the ground. However, as order volumes climb and the business transitions from a small entity to a medium enterprise, the leadership must pick a direction regarding fulfillment operations. In terms of options, the growing company can choose to invest in a warehouse and internal fulfillment team or bring in a third-party logistics (3PL) provider to handle fulfillment activities.
There is no right or wrong answer when deciding on a fulfillment model. As order volumes reach thousands monthly, consider the company’s priorities, core competencies, and long-term goals to decide which model works best for your organization. In this article, we’ll discuss some of the benefits and drawbacks associated with each fulfillment model to help you make an informed decision for your expanding business.
Investing in In-House Fulfillment Capabilities
Some sellers handle order fulfillment internally rather than bringing in a logistics partner. A company might choose to do this for a variety of reasons, such as:
- Maintaining strict control. When you build an enterprise from the ground up, passing off responsibilities can prove difficult when the time comes. Companies that handle fulfillment internally maintain complete authority over all fulfillment activities.
- Developing expertise. Choosing to handle fulfillment without external help lets the company develop a cradle-to-grave view of the operation. So long as the organization can avoid putting fulfillment in a silo, internal fulfillment provides unique insight for other teams, such as procurement, sales, and marketing.
Though control and experience have merit for many businesses, running fulfillment internally also has the following drawbacks:
- High upfront investment. As order volumes grow, businesses must make significant investments to handle orders directly. To start, you will need a fulfillment center, a warehouse management system (WMS), an order management system (OMS), a transportation management system (TMS), fulfillment center staff, as well as material handling and picking solutions within the warehouse. The upfront cost will run in the high six figures or more.
- Significant resource commitment. Fulfillment takes a lot of time and can drain financial resources out of the company. For this reason, internal fulfillment becomes a distraction from revenue-generating activities like sales and marketing for some companies.
Using a Third-Party Fulfillment Services Provider
Many e-commerce and retail business use a 3PL to handle fulfillment on their behalf. When partnering with a fulfillment provider, business leaders should prepare for the following:
- Giving up some control. You will need to learn to rely on your partner’s expertise for much of the day-to-day fulfillment activities. This loss of control is concerning for some businesses since fulfillment directly impacts the customer experience. With that said, however, your 3PL should maintain open lines of communication and provide you with opportunities to benchmark their performance.
- Not all 3PLs are the same. One of the biggest challenges associated with outsourcing fulfillment involves finding the right partner. Some businesses may need a 3PL with experience fulfilling orders in specific industries. On the other hand, some 3PLs may pursue any contract—regardless of whether they have the infrastructure and fulfillment network to serve your customer base properly. When looking for a logistics partner, ask many questions, talk to existing customers, and tour the provider’s facilities to make sure they can do what they say.
Despite these frustrations, however, the benefits of hiring a fulfillment provider far outweigh the risks for most companies. Some of the advantages of using a 3PL include:
- Full scalability. A fulfillment provider can scale up and down with your sales volumes, allowing you to handle peak sales periods or slumps easily.
- Market access. When you use a 3PL with a national fulfillment footprint, you can place inventory near any large customer base to facilitate fast, efficient, and affordable shipping.
- Cheaper parcel shipping. A logistics provider will leverage the total shipment volumes of all its customers to negotiate lower rates with USPS, UPS, FedEx, DHL, and regional carriers.
- Existing experience. Using a fulfillment partner lets you benefit from many years of expertise immediately.
- Fixed costs. The cost of staff, real estate, and technology gets built into your rate and spread out over your contract, mitigating the need for significant upfront investments.
For these and many other reasons, many mid-sized retailers and e-commerce sellers have turned to 3PLs for help with fulfillment.
About Phoenix Logistics
Strategic Real Estate. Applied Technology. Tailored Service. Creativity. Flexibility. These fundamentals reflect everything we do at Phoenix Logistics. We provide specialized support in locating and attaining the correct logistics solutions for every client we serve. Most logistic competitors work to win 3PL contracts, and then attempt to secure the real estate to support it. As an affiliate of giant industrial real estate firm Phoenix Investors, we can quickly secure real estate solutions across its portfolio or leverage its market and financial strength to quickly source and acquire real estate to meet our client’s need.