Outsourced Fulfillment

What it’s All About

Outsourced fulfillment is centered around taking your inventory and shipping operation and moving it to a privately-owned warehouse that stores inventory, receives, packs, and ships orders. You’ll still be purchasing inventory from suppliers, but you won’t need to get your hands dirty with the grind of fulfillment.

The abbreviation 3PL will appear a lot from here on out, and it stands for third party logistics provider — they’re the services you’ll work with when outsourcing. An e-retailer who outsources sends them inventory that they keep safe and sound in their warehouse, plucking products from storage when it’s time to fulfill an order.

The Sources of its Appeal

E-retailers outsource fulfillment because they’d rather have someone else handling the administrative task of fulfillment. Maybe they can’t stand it, maybe their order volume is too large for them to handle it themselves, or maybe they prefer the efficiency of a 3PL. Whatever the reason, they’re outsourcing the entire process.

That’s the source of outsourced fulfillment’s appeal, and it can’t be understated. Because you won’t need to spend your time getting orders on their way, you’ll have more time for just-as-important matters, whether it’s content marketing, SEO optimization, or building your brand — all while the 3PL stores product and ships orders.

Plus, 3PLs are able to offer some bottom-line-beneficial perks only accessible by using their services. Because they typically ship a large quantity of orders for a variety of businesses, 3PLs have the power to negotiate discounted shipping rates with carriers that their clients can take advantage of. And because they’re handling it all for you, you don’t need to worry about hiring and training temporary or full-time employees for fulfillment tasks.

Outsourcing Issues

Handing off your fulfillment operation to experts is a big weight off e-retailers’ shoulders. But big tradeoffs exist when outsourcing. Compared to in-house or just-in-time fulfillment, you won’t have nearly as much control over your fulfillment —- you’re paying someone else to deal with it.

You’ve added a third-party to your business that does things their own way, and that erosion of control can have some repercussions that you should be aware of:

Harder to brand

Fulfillment is not in your control, and that puts your branding in limbo. Personalized and custom packaging might not be an option when working with 3PLs, especially if it adds steps to the efficiency of their existing operation. That said, they might be willing to accept material you send their way. Just ask if it’s possible.

Lack of inventory visibility

This is a large cause of discomfort. Inventory, your largest investment, is far away from you. It’s in the 3PL’s possession, and you must have a way to get an accurate inventory count, less you risk a stockout or overstock.

Complicated returns management

Packages that are returned are sent back to a ship-from location, and that tends to be the 3PL when outsourcing, not you, the e-retailer. That’s a barrier between you and an unhappy customer that can cloud clear feedback on what went wrong in the process.

Costs

Outsourced fulfillment is not for everyone. It can get expensive; with every order a 3PL fulfills, a slice of that revenue will go towards paying them. Not to mention they charge storage fees, you most likely will pay for shipping, and... well, we’ll get to the costs soon.

All of these downsides aside, once your outsourced model is set up, your fulfillment process should run like clockwork while you go about growing your business instead of maintaining it. But setting it up and dealing with the costs are, without a doubt, the most difficult parts of the model.

Bottom Line Impacts

Now for the nitty gritty, the factors that impact whether or not you should use a 3PL and how much you’ll pay for their services. Because you’re bringing an external service into the mix, the fulfillment process of your business will get a little more intricate and expensive. Ask yourself these questions as you consider outsourcing:

Is order volume consistent?

The expenses involved in outsourcing largely depend on how much inventory you’re storing, and, by extension, the demand you’ll need fulfilled. A consistent order volume that’s predictable and reliable will help keep costs manageable.

Are the products suited for outsourced fulfillment?

3PLs speak one language: efficiency. If products are perishable, personalized, handmade, difficult to store, or fragile, outsourced fulfillment might be difficult. Non-perishable, easy-to-store-in-bulk products are preferable.

Is it easy to route orders to the 3PL?

In order to fulfill them, 3PLs must have orders sent their way. This can be done in a variety of ways that we’ll cover in greater detail later; you can email, fax, call, or integrate with a fulfillment provider to send orders to them for fulfillment.

The Costs

The main hurdle to outsourced fulfillment is the mountain of costs involved. They abound when working with a 3PL, and each service has its own unique way of charging you. Here are several costs you can expect to encounter.

Setup Fees

As mentioned a couple of time already, lack of visibility into inventory is a major issue when outsourcing. Product, your largest investment, isn’t at arms-length. It’s at camp in a third-party run warehouse that waits for your orders to do its job.

You need a way to get inventory counts and a way to send orders their way for fulfillment. There are a few ways to do this.

When orders are placed, you can choose to email them to 3PLs, give them a ring, or send faxes their way, so long as they accept the method (email is the most common). Usually, a 3PL will either email you product quantities on-hand or send them through FTP (File Transfer Protocol) on a daily basis. They’ll also provide quantities of a specific product on request.

Or you can forego all of that and integrate with them at the cost of a setup fee that ranges from the hundreds to the thousands of dollars. But don’t get too alarmed about that price point. The setup fee tends to be worth it — it’s what the 3PL charges to build an integration that works with your sales channels.

Here’s how it goes down: once an order is placed on an integrated channel, it’s able to communicate with the 3PL via the integration, automatically alerting it to a ready-to-be-fulfilled order. The 3PL gets the message and fulfills the order, relaying additional information like tracking info back to your channel.

Because they work with plenty of businesses, larger 3PLs usually have integrations with common sales channels like Shopify or Amazon, so there’s a chance that setup fees will be waived or lowered. But any unique channel — like a home-grown cart or fresh-on-the-market app — will require someone to build the integration, whether it’s the 3PL or a freelance software develpper.

Order Management Systems

But the more sales channels, the more complications. If an e-retailer sells on multiple channels, whether it’s via social media, a cart, or a marketplace, they’ll have several channels feeding into the same inventory that’s stored far away from you. No e-retailer wants to pay a boatload for individual integrations with each channel.

That’s where an order management system (OMS) fits in — it acts as a central hub that connects to all sales channels and keeps track of orders and inventory. Here’s how it works:

1. Sales channels integrate with the order management system (OMS), letting the user manage every order from every channel in a single place.
2. The 3PL integrates with the OMS.
3. As each channel’s orders flow into the OMS, it routes them to the 3PL for fulfillment.
4. The 3PL receives and fulfills the order.
5. The 3PL relays pertinent order information like tracking info back to the OMS, as well as an updated inventory count.
6. The OMS passes the order information to the channel it was made on and updates inventory quantities.

Note: When using an order management system, it isn’t strictly necessary that you integrate it with your 3PL for automated routing. It’s perfectly possible to receive incoming orders and then email them manually to your 3PL for fulfillment.

Storage Fees

Be ready to pay for storage. Called storage fees, the 3PL will typically ding you for how much space your stored inventory takes up, calculating the fee based on how many pallets or footage you need, which are usually measured in square or cubic feet.

Calculations work like so: take the dimensions of your packaged, stored product, whether it’s a box of 50 or box of one, and determine how many will fit on a pallet or within a measured space — a 3PL’s pricing will ascertain which of the measurements they use. The 3PL will then charge a set amount based on their pricing, like $0.50 per cubic foot or a $15 monthly fee for every ½ pallet used.

Usually on a monthly basis, the 3PL will conduct an inventory check to see how much space you’re taking up, and adjust their charges accordingly. But be careful — while it’s technically not a cost, 3PLs tend to require storage minimums.

Prior to storing and fulfilling products, a 3PL might demand that a minimum amount be stored to guarantee that your business is worthwhile. For example, if the quantity you need stored doesn’t quite meet a pallet’s worth, some 3PLs are willing to store it — but they’ll charge you for that minimum pallet’s worth at the end of the day.

And the longer your inventory stays shelved with a 3PL, the more likely they will ratchet up fees called “long-term storage fees.” They’re pretty straightforward: a 3PL will tack on a long-term storage fee alongside their normal storage fees when a product collects dust for longer than a certain period of time.

Picking and Packing Fees

Whether it’s a human hand or robotic claw, something must process orders; something will pluck SKUs from storage and package them. Third-party logistics providers will charge a fee for this, called pick and pack fees, on a per order or per item basis.

Pick and pack fees are directly related to order volume, and 3PLs often aim to attract high volume merchants to make more money. In their pricing, most 3PLs will adjust their pick and pack fees, applying scaled discounts based on order volume.

Here’s a look at how Shipwire, a popular 3PL, charges, for example:

Order Volume	Full Pick Price	Additional Pick(s) Price
1-50	$2.85	$.95 each
51-250	$2.25	$.75 each
251-2,500	$1.95	$.70 each
2,501-5,000	$1.85	$.65 each
5,001-10,000	$1.83	$.63 each
10,001-15,000	$1.81	$.62 each
15,001-20,000	$1.80	$.61 each
20,000+	Call for pricing	Call for pricing

Pick and pack fees occasionally bundle in other expenses as well. A 3PL may decide to charge a slightly higher pick and pack fee that includes packaging material costs, for instance. Those costs may also be charged separately — just be sure to review their pricing structure.

Order and Weight Handling Fees

Alongside the pick and pack fee, a 3PL might attach a fee for order or weight handling. Usually these charges depend on the order’s weight, as well as how a 3PL ships the product.

Fulfillment By Amazon (FBA) — another popular service used by plenty of e-retailers — offers a good example of how order, weight, and pick and pack fees work together. Their pricing structure lays it all out; fees are segmented by shipping methods, and weight handling fees scale by weight:

Fulfillment Fee	Standard Shipping	Two-Day Shipping	Overnight Shipping
Order Handling (per order)	$1.90	$7.40	$14.40
Pick and Pack (per unit)	$0.60	$0.60	$0.60
Weight Handling (first 15 lbs)	$0.45	$0.55	$1.50
Weight Handling (next 16-70 lbs)	$0.45	$0.70	$1.75
Weight Handling (next 71-150 lbs)	$0.45	$0.85	$2.00

Shipping Fees

Of course, your 3PL will be shipping your orders, and — depending on the service — you will have to pay that cost to ship. That cost will vary based on the methods that the 3PL uses, as well as whatever shipping methods you request that they use. But the good news is that the 3PL’s fee tends to be cheaper than what an e-retailer would normally pay on their own since the 3PL is able to negotiate cost-effective rates due to the high order volume they juggle.

Receiving Fees

The inventory you store in a 3PL has to get there somehow, and that typically means another fee. Referred to as a receiving fee, some 3PLs will charge you for receiving a scheduled resupply, setting up storage for it, and reporting the new inventory level. Typically the cost is based on either the SKU quantity you’ll need handled or how many hours it takes to get the job done.

Returns Processing Fees

Just when you thought returns couldn’t get more annoying, some 3PLs will ding you for packages returned to their HQ. They will take the return, process it, inspect the packaging and product for any issues, collect and record feedback, and alert the seller of the return. After all of that, it’s up to the e-retailer to decide if they want the return sent to them for further inspection or if they want it restocked or thrown away. For all that work, they normally charge a per order fee.

The Process

Alright, with all of those out of the way, let’s walk through the flow of outsourced fulfillment. Because the model involves multiple parties — you, your supplier and your 3PL — it makes for a more complicated process. Here are its ins and outs.

1. Purchase product
   Unless you’re manufacturing it yourself, you’re going to need to request and purchase product from your supplier(s).
2. Have inventory shipped to your 3PL
   As you order product, you can either request that it be shipped to your 3PL’s warehouse(s) for storage or you can receive the product, inspect it, and then ship it to your 3PL yourself.
3. Make a sale
   Thanks to your rockstar online marketing, traffic heads to your site and a sale is made!
4. Route the order to your 3PL
   As mentioned earlier, there are a few ways to route orders that usually depend on the 3PL’s preference; phone call, email, or integration.
   Phone call — In this situation, an uncommon one, you’d call your 3PL and place a verbal order. It’s not exactly efficient, it’s a little archaic, but it’s out there.
   Email — The most common form of routing is via email. A seller processes an order on their sales channel or order management system and manually emails the order to their 3PL who receives and fulfills it.
   Integration — A more expensive but more automated way of routing orders is through an integration between your sales channel(s) or OMS and the 3PL. It comes at a cost, but every order that’s made on a sales channel is auto-routed to the 3PL for fulfillment.
5. The 3PL fulfills the order
   Your integrated 3PL receives the order, picks it from storage, packs it, and ships it off. Order tracking info is then relayed back to you via email or through your integrated order management system.

An Outlook On Outsourced Fulfillment

It’s daunting, isn’t it? There are plenty of potential charges just to get an order out of a warehouse door to the customer’s door. To make matters a little worse, these prices have the potential to rise as more and more merchants join the ecommerce fray, looking for 3PLs to do the work for them. And the less space, the more costly it’ll get.

This isn’t to discourage you from considering outsourced fulfillment, because it comes with that serious advantage of not having to handle fulfillment. Just be sure you understand exactly how much of a slice of revenue your 3PL is going to take from every order they fulfill, as well as the other charges, like storage and receiving fees, that come with stocking product with them.

Margins and expected order volume are the keys for forecasting whether outsourced fulfillment is feasible for you. There’s no average order volume universally understood to mark when it’s time to outsource — it depends on too many business-specific factors, like reliability of demand, product margins, and other costs like overhead or marketing-related expenses.

Instead, you need to confidently forecast your demand, and, most importantly, intimately understand the pricing of your 3PL to ensure that your margins can take the hit. For that, selecting a 3PL with a pricing structure that works with you and your product is an absolute must.