Ecommerce Order Fulfillment Strategies: Side-by-side

Whether a customer places an order online, by mail or over the telephone, he or she expects nearly instant gratification. Delays or errors in order processing and order fulfillment are the leading cause of dissatisfied customers, followed by a customer service team that is unable or unwilling to offer an adequate solution.

Having a top-notch order fulfillment process makes all of the difference between satisfying current customers and capturing repeat business, and struggling to fulfill return and refund requests.

Ecommerce Order Fulfillment in 3 Ways: Drop-shipping, in-house, and 3PL

There are three ways in which a company fulfills ecommerce and other orders: by hiring and utilizing in-house staff, drop shipping from its suppliers (see our guide on questions to ask dropshipping suppliers here), and outsourcing to an order fulfillment operation. Each of these methods has its benefits and drawbacks, and one method may be better suited to the needs of a particular business than are the other two.

Ecommerce Order Fulfillment Strategy: Drop-shipping Pros and Cons

The micropreneur or ultra-small business may depend on drop-shipping. Having a drop-shipping arrangement with its vendors eliminates the need to have a facility and manpower to receive, shelve and then ship goods.

Eliminating inventory on hand also saves money for the business that is located in a state or province that levies an inventory tax. Drop shipping is an excellent fulfillment method for a home-based business, a business that lacks storage or warehouse space or one that is located in an area that is difficult for large trucks to navigate. Trucking firms charge additional fees if deliveries or pickups require a liftgate, inside delivery or have no loading dock available. Drop shipments avoid inbound freight accessorial fees.

Drop-shipping challenges

There are several downsides to drop shipping, however. The first is that the shipper has no control over the process. A retailer has to depend on the capabilities of his or her vendors; if a vendor hires staff that is inattentive in picking the product, packaging or labeling, then that retailer's customer is likely to receive a package that contains the wrong product or one that is damaged. In order to correct the problem, the retailer will have to issue a return goods authorization, reorder the correct product from the vendor, pay for reshipment and then negotiate a credit from the vendor on the original shipment.

In addition, if a vendor is unethical, he or she may steal the retailer's mailing list and begin marketing directly to those customers the retailer has brought in. After all, the vendor has immediate access to the customer's name, address, contact e-mail, telephone number and the type of merchandise they have purchased.

A second downside to drop-shipping is that the retailer must wait until a minimum order quantity or value is reached before they are able to fulfill the initial customer order. This can cause undue delays for the first customer who has made a purchase and create havoc during peak ordering times such as the holiday season. Orders that require a 3- to 6-week delivery window are orders that are likely to be canceled.

Finally, many vendors will not drop ship. This reduces the number of wholesale opportunities that are available to the retailer, which also limits the ability to negotiate the best prices or capture the widest selection of merchandise.

Ecommerce Order Fulfillment Strategy: In-house pros and cons

A second order fulfillment option is for the retailer to perform these duties in-house. This requires the business to hire staffers who have shipping and receiving experience. This also requires having warehouse space for storing inventory and purchasing and storing shipping materials such as boxes, crates, pallets, peanuts, bubble wrap and tape. In addition, there may also be a need to purchase or rent material handling equipment.

In-house ecommerce order fulfillment affords the retailer more control over the fulfillment process and creates a closer alignment between order entry, merchandise procurement, and order fulfillment. Products can be inspected upon receipt for damage and to ensure the correct materials have come in. Pick and pack functions can be closely supervised to ensure those materials go out in good order. Any returns or mis-shipments can be resolved in days, with the retailer taking full responsibility for correcting the error. In-house shipping streamlines the ecommerce order fulfillment process and ensures the more timely delivery of products.

In-house challenges

In-house shipping increases a business' overhead expenses, sometimes dramatically. Creating a pick and pack area involves installing heavy duty shelving and well-marked storage containers that are logically organized and easily accessible to employees.

If a business begins to grow and offer more merchandise, its warehouse space requirements will also grow. As the retail operation becomes larger, then there may be a need for material handling equipment such as a pallet jack, forklift or scissors lift. Whether these are purchased or rented, the per month cost can easily slash the profit margin of a small business.

The shipping area will also need to have specialized shipping software and hardware installed. Freight carriers today make use of bar coded labels to track shipments, and these require a specialized bar code printer and barcode software to create. Both FedEx and UPS also communicate via specialized software with the shipper to schedule pick-ups and calculate invoices.

Additional safety mechanisms, procedures, and training must also be implemented. "Struck by" incidents - those that involve an employee being hit by a falling object or moving vehicle - as well as injuries caused by improper lifting, are the most expensive safety issues that businesses doing in-house shipping face.

Training employees to safely use material handling equipment, to lift and move heavy boxes and to maintain a safe shipping environment not only takes time and effort, it is required by OSHA. The cost of workers compensation insurance also increases with the presence of an in-house shipping area, as the probability of accidents and injuries goes up with this function. Warehouse work is one of the top 14 occupations listed by the CDC as having the most work-related injuries.

One final drawback of a business doing its own shipping is that it will have to negotiate freight rates with each of its carriers, often on an annual basis. Freight haulers often contract on an annual basis and calculate rates and discounts based on prior year volume. Small businesses who are just beginning to ship greater quantities of goods have little negotiating power, as they have no history they can leverage.

If current year shipments have skyrocketed compared to the previous year, the in-house shipper may be paying too much for outbound freight. In addition, if a retailer uses an LTL or TL trucking firm periodically, they are likely to be charged the retail cost to ship. Shipping costs for small shippers can bounce depending on current and projected cost of fuel; larger shippers often are provided a cushion against gas price spikes.

Ecommerce Order Fulfillment Strategy: Outsourcing (3PL) pros and cons

A third solution to the order fulfillment challenge is to outsource the order fulfillment process to a specialty firm, this is also known as outsourcing to third-party logistics (3PL). The ecommerce order fulfillment enterprise is just that - a business whose sole purpose is to receive goods from various vendors, store goods, pick, pack and ship goods, for one or several wholesale and retail businesses.

Order fulfillment businesses locate in areas that are logistically favorable, close to major highways and often near rail lines as well. These enterprise parks tend to be low rent and low tax, as they are strictly industrial in nature, which reduces overall operational costs to the fulfillment provider. Because a fulfillment operation is, in its essence, a distribution center, it will be set up with the storage and shipping supplies and equipment that is needed for order fulfillment for products ranging in size from a diamond ring to a spinet piano. A fulfillment operation calculates its fees based on the amount of space a business requires, the amount of handling each unit received in and shipped out demands, the volume of goods returned and the cost to integrate fulfillment with order entry and transfer. These costs vary from client to client and depend heavily on the quantity of goods a retailer handles.

3PL challenges

While the logistics are obviously optimized with a 3PL, the primary obstacle to outsourcing to a specialist for a very small or start-up business are the initial integration costs. It may require $1000.00 or more to integrate the order fulfillment center's software with that of the client company. It may also be difficult for the client company to estimate their space needs, especially during a product launch.

Our winner:

Outsource to a 3PL

For most, a third-party logistics provider isthe optimal path. There are several benefits to employing a specialized outsourcing solution for order fulfillment. The first is that the business is scalable to the retailer's needs. As a retail operation grows, it only needs to request more space. The cost per square foot may go down as space requirements grow, as the overall revenue generated by a growing business increases with each pallet of materials received, stored and shipped.

As a distribution operation, the order fulfillment enterprise trains its staff in receiving and shipping best practices. It may automate a number of functions, including package handling, loading and offloading and on-the-fly labeling. This type of enterprise relies on a workflow that is efficient, safe and accurate; errors or non-cost-effective processes on their part may cause their client to move his or her inventory elsewhere. The order fulfillment operation assumes the risks associated with warehouse operations and is designed to be OSHA-compliant and have the appropriate workers' compensation coverage for its employees.

Since an order fulfillment operation ships and receives large quantities of goods daily, it has the ability to negotiate freight rates with a number of carriers that are favorable to the end client. Shipping costs can be a dealbreaker for the customer, so the retailer who is able to offer reduced, flat rate or free shipping as a "perk" is often the one who captures customers for life. Order Fulfillment houses also carry the documents needed for international shipments, expanding its clients' ability to engage in global sales and exporting.

The order fulfillment warehouse helps small to mid-sized ecommerce businesses leverage the operation's economies of scale in order to optimize the supply chain while keeping the client's enterprise lean. Many successful marketing companies, such as the infomercial powerhouse Tristar, rely on an order fulfillment service to build a dynamic sales establishment and brand that is recognizable throughout North America. For the ecommerce entrepreneur who prefers focusing on sales and marketing rather than picking, packing and shipping, outsourced ecommerce order fulfillment may be the optimal solution.