[Updated post from April 8, 2021]
Should you fulfill orders yourself, or outsource fulfillment to an external provider?
This is one of the most frequently asked questions in logistics - and for good reason.
Deciding whether to continue fulfilling orders in-house or to outsource to a fulfillment partner is a huge business decision that can have major implications not only for the efficiency of your fulfillment process, but also the quality of the customer experience.
But what are the key differences between self-fulfillment and outsourced fulfillment? And more importantly, which is more favorable to your business?
We’re going to explore the pros and cons of both fulfillment strategies, and what your business needs to consider when making the switch to outsourcing order fulfillment.
Self-fulfillment, also known as in-house fulfillment, is when brands manage the entire fulfillment process independently, as opposed to outsourcing order fulfillment to a third-party logistics provider.
An e-commerce business that is handling fulfillment in-house is responsible for all order fulfillment processes, including:
Brands that opt to fulfill in-house are also in charge of the administrative side of order fulfillment, such as hiring and managing workers who carry out fulfillment-related tasks, finding warehouse space, and sourcing packaging materials.
Outsourcing fulfillment is the opposite of keeping fulfillment in-house. An outsourced fulfillment solution sees e-commerce retailers bring in a third-party logistics company to manage order fulfillment on their behalf.
An outsourced fulfillment provider is responsible for some or all of the fulfillment process, in addition to any value-added services you may require. Fulfillment companies will typically provide their own storage and fulfillment centers, as well as the necessary labor, materials, and technology to fulfill orders effectively and meet customer expectations.
Traditional e-commerce 3PLs are a popular way to outsource fulfillment, but there are other fulfillment solutions available to businesses, such as dropshipping and Amazon fulfillment (or a combination of the above).
Inventory needs to be received and stored safely until it’s required for order fulfillment. An e-commerce business may need to outsource storage to specialized fulfillment centers to maintain product integrity and sequencing such as FIFO (First In, First Out). During peak season, it may also be necessary to seek additional storage space for seasonal inventory. Some retailers will only need a centralized warehouse location to store their inventory, while others will use a multi-node system that places SKUs at several facilities that are close to important customer hubs.
The storage, monitoring, and reporting of SKUs are a vital part of keeping your product catalog organized. Retailers need to make sure they’re not going to run out of popular items and miss valuable sales, or order too many units and end up with excess inventory. A fulfillment company can provide you with in-depth inventory reporting to prevent the over-selling of merchandise and set reorder points.
Order fulfillment refers to the steps that need to be taken to get an order ready for shipping. This includes processing orders submitted to your online store or other sales channels, picking items, and packing and labeling orders according to an assigned blueprint. Depending on your brand’s fulfillment needs, the packing process could be quite complex, such as an unboxing experience that requires specific training.
Order fulfillment is frequently the most time-consuming part of any fulfillment operation, requiring a lot of manpower and technology to execute effectively. As your order volume increases, it often becomes necessary to outsource this fulfillment service.
All merchants need to minimize their shipping costs while still meeting expectations for fast delivery times. Outsourced providers cultivate relationships with multiple shipping carriers to access discounted rates and assist businesses in abiding with carrier regulations for different classes of packages, such as oversize or hazmat shipping.
Receiving, processing, and reconditioning returned merchandise to get it ready for resale is just as important as preparing outbound orders. How strict or lax your return policy is will determine how many returns your business is likely to handle. It may be necessary to outsource this process to process refunds quickly and ensure that you don't miss valuable resale opportunities that can result in dead stock.
In-house fulfillment is the most straightforward route for fledgling online brands. When order volumes are low it's much more cost-effective to handle fulfillment yourself, rather than outsource order fulfillment to an external service provider.
All that brands need is somewhere to store inventory like an office or garage, to stock up on packaging materials and print some shipping labels, and you can start fulfilling orders. This allows you to keep storage fees and fulfillment costs down while you’re building up your order volumes.
Fulfilling orders in-house gives an online store the ability to experiment with how they want their packages to look and feel at the point of delivery. Branded packaging, gift-wrapping, and inserts such as handwritten notes are effective ways to personalize the brand experience. But such extensive customization abilities aren't offered by every fulfillment services provider. By managing fulfillment yourself, your business has total freedom and flexibility over these decisions.
The flipside of not having to run a fulfillment center or be responsible for managing inventory is that your business has to brief and prep an external team to do this on your behalf. This can make it a lot harder to make changes on the fly in response to customer feedback. Depending on how much fulfillment expertise you have internally, it may be more advantageous to keep logistics management in-house.
Many merchants opt for in-house fulfillment because they're expecting to incur significant cost savings. But while fulfilling orders independently helps brands to save money when they have low sales volumes, this approach struggles to support robust business growth.
As more orders come in, brands will start needing more inventory and therefore more storage space to meet demand. They'll also require a bigger labor force to pick and pack those orders. They may also be required to purchase equipment to increase productivity. In sum, fulfillment costs can quickly spiral out of control as your order volumes increase. Unless you’re handling an exceptionally large volume of orders, in-house fulfillment is unlikely to be cost-effective for your business in the long term.
Managing everything yourself might seem simple, but in-house fulfillment means flawlessly executing a range of fulfillment services if customers are going to receive orders without delay. As your business grows, troubleshooting logistical problems will become much more time-consuming and incur a range of opportunity costs. If you're spending your time on fulfillment rather than refining or marketing strategy for generating sales, business growth could end up stagnating.
Order volumes across sales channels do not stay consistent throughout the year. Brands will encounter different peaks and troughs in the calendar depending on what they're selling and who their audience is. This is challenging to manage if your business is solely responsible for adjusting staffing levels or storage space in response to seasonal fluctuations in demand. If you’re unable to forecast demand this effectively, you could end up with delays to order processing or escalating labor costs – neither of which is good for your bottom line.
In-house fulfillment involves a variety of hidden costs that can quickly overwhelm your business. Because outsourced providers operate on a vast economy of scale, they can offer fulfillment services at much more affordable rates than businesses can achieve independently. For example, fulfillment providers can negotiate for bulk discounts on shipping rates with major carriers due to the huge parcel volumes they send into the system, meaning that your shipping costs will be much more manageable.
Partnering with a fulfillment provider allows you to manage unexpected surges in order volumes with much greater ease. Choosing a partner that operates a multi-node network of facilities enables brands to obtain warehousing space in multiple strategic locations close to their customers. Distributing inventory in this way shortens last-mile delivery timeframes so that customers wait far less time to receive orders, boosting customer satisfaction.
Partnering with a fulfillment company that keeps pace with advancements in technology helps your brand to avoid time-intensive manual processes that slow down the fulfillment process. Because order fulfillment is their core competency, brands can leverage the expertise of industry professionals to achieve a more efficient, streamlined fulfillment strategy. Their investments in automation and reporting assist your business in making smarter, data-driven decisions about their fulfillment strategy that reduce costs and create better customer experiences.
Choosing to outsource order fulfillment frees up a huge amount of extra time for you to focus on other areas of your business, such as CX management and generating sales. When you no longer have to get up close with how your orders are being fulfilled, your business can scale much more effectively by focusing on the front-facing side of your brand.
Choosing to outsource fulfillment comes at a significant cost, especially if you're selling niche products or require value-added services. Extra services such as kitting and subassembly are routinely priced separately from core fulfillment services because they require extra time and labor. If your e-commerce business has low order volumes, outsourcing fulfillment is unlikely to be cost-effective.
Finding a fulfillment services provider who meets your needs and operates across the right sales channels is no small undertaking. Capabilities will vary hugely between different providers in terms of value-added services, shipping speed, fulfillment center locations, and the bulk discounts they're able to secure. It can take considerable time and effort to map out your own fulfillment needs and vet potential fulfillment providers, especially if you’re outsourcing for the first time.
Bringing in a fulfillment provider means that your business will no longer have direct control over the everyday fulfillment activities. This degree of separation can create anxiety for brands that are used to having a hand in the fulfillment process. It takes a high degree of trust with your fulfillment partner for this relationship to go smoothly, so your business must be ready to take this step.
We've explored the pros and the cons of in-house fulfillment vs. working with an outsourced fulfillment provider. So, how do you know which method is right for you?
It’s normal for an e-commerce business to start by self-fulfilling its orders. If you're only handling a few hundred orders per month, outsourcing fulfillment services is unlikely to be cost-effective for your business.
If you have a high SKU count which requires complex storage or want a highly customized packing plan, it’s very difficult to offset these costs against a low order volume. Brands have much more freedom to experiment and perfect these processes by keeping fulfillment in-house
The location of your customers is another important consideration. If you’re a young business, you’ve likely leveraged local connections and business partnerships to begin building brand awareness. It may be an advantage to keep your fulfillment operation centralized and close to home to ensure fast shipping times that enhance customer satisfaction.
Ecommerce brands will ultimately hit a point where in-house fulfillment is no longer cost-effective or has become too complex to manage.
In addition to warehouse and utility expenses, IT software is one of the most overlooked fulfillment costs. As your operation grows, advanced technology is essential to give you real-time visibility over inventory and orders - a huge cost and maintenance responsibility for businesses to take on. If your order volumes are growing, your customer base is likely becoming more geographically diverse. Serving customers in more distant regions puts a lot of pressure on your operation to ensure that delivery timeframes don’t lengthen. Transitioning to outsourcing will provide you with more strategic warehouse locations that reduce shipping costs and last mile delivery times.
While you might be certain that the time has come to outsource fulfillment, it's not always obvious. While it's tempting to take an 'if it ain't broke, don't fix it' approach to your fulfillment strategy, this can backfire if you encounter a sudden rise in order volumes you can't manage, or start requiring fulfillment services you can't offer in-house.
It's much better to be proactive by consistently evaluating your operation for whether the following issues are becoming more prevalent:
Do you feel like your growth is being hindered because your operation can’t keep up with demand?
Are you focusing on fulfillment issues more than you would like?
Are you comfortable with the idea of letting a fulfillment company manage your needs?
Are your order volumes increasing/does outsourcing make increasing financial sense?
It's not possible to outsource fulfillment effectively unless you have a good grasp of your own needs.
Understanding your products, order characteristics, sales channels, and customer expectations will help you to identify what you need to look for in a potential fulfillment service provider. Here are some questions to ask yourself to help evaluate potential partners:
The more you spend time digging into your business, the easier it will be to find the best outsourced order fulfillment method for your business.
Although traditional 3PL providers are the most well-known form of outsourcing, it's not the only option available to your business. It also might not be the most suitable for your needs. That's why it's important to compare e-commerce fulfillment models to see which is the best fit:
Dropshipping is an outsourced order fulfillment strategy where the merchant isn't responsible for storing or managing inventory. The products they sell are supplied or manufactured by an external provider, who is also responsible for fulfilling and shipping orders on the merchant’s behalf.
Dropshipping is a straightforward way of outsourcing because it completely cuts out logistics management for direct-to-consumer retailers. They don't have to worry about labor management or inventory levels – the only thing a brand merchant using a dropshipping model needs to worry about is generating sales.
However, not owning inventory means that the profit margins for dropshipping brands are considerably lower. Because it's a low-maintenance option, dropshipping is an incredibly competitive space that's hard to succeed in unless you have a very niche product.
Fulfilled By Amazon, also known as FBA, is an e-commerce fulfillment service that allows Amazon sellers to leverage its vast fulfillment and storage network to fulfill Amazon orders. Businesses send their inventory to Amazon fulfillment centers for storage. When a customer places an order, Amazon is responsible for picking, packing, and shipping the order.
FBA is a popular fulfillment option thanks to its transparent pricing and reliability in meeting customer expectations for rapid delivery. The expansion of Amazon's multi-channel fulfillment offering is also opening up these capabilities to non-Amazon sellers who are looking for a reliable outsourcing model for more sales channels.
While Amazon offers a lot of conveniences, brands using FBA have very little control over fulfillment. You don't choose what fulfillment center your inventory is stored in, or stipulate the use of branded packaging or promotional inserts. If you want to be involved in the order fulfillment process, Amazon probably isn't the best option for your business.
A traditional e-commerce fulfillment or third-party logistics provider is an external partner who is responsible for managing some or all fulfillment-related tasks on behalf of a business. A 3PL is in charge of receiving and storing inventory supplied by the merchant, managing order fulfillment for one or more sales channels, and providing the necessary warehouse space.
A key advantage of 3PLs is that they allow you to combine multiple forms of outsourced fulfillment within one strategy. For example, if you're also using Amazon FBA, your 3PL can take charge of sending inventory to amazon fulfillment centers and also receiving the returned merchandise. If some of your product catalog is dropshipped, your order fulfillment provider can provide customer care for those orders to ensure a consistent customer experience.
So, how can you make the transition from self-fulfilling to outsourcing e-commerce fulfillment effectively? Deciding to bring in an external provider is a big decision, especially if you’re a rapidly-growing business that requires a serious pivot in its fulfillment and shipping strategies. The best place to start is by acquainting yourself with the most important traits to look for in a potential fulfillment partner – we recommend checking out our blog on the topic!
