Previously, we discussed sourcing products, touching on the difference between doing your own fulfillment by buying products at wholesale and shipping from your own warehouse, and dropshipping by having distributors ship directly to your consumers.
There is a third option, as well, which is, more or less, a hybrid of these: buying products at wholesale and having an outside third-party warehouse ship your orders. These are called Third-Party Logistics providers (3PLs). We’ll discuss all three in this installment.
You should also note that you can use a combination of these, as well. Many of our clients warehouse and ship some products themselves, while also relying on dropship vendors to fulfill other orders.
There’s something a bit rewarding by walking through a warehouse lined with products ready to be shipped to the corners of the earth. The challenges to maintaining a profitable self-fulfillment operation, though, are considerable:
- You want to keep as little of your capital tied up in inventory as possible, but yet you want to keep sufficient stock levels to meet customer demand. If you’re new to this, it can be a lot of guesswork at first. But, over time, you’ll have the metrics available to help you make more intelligent purchasing decisions.
- Warehouse overhead — including personnel — is another line item cost for your business. And having people at work in a warehouse presents additional requirements for safety.
- If you’re wise, you’ll be seeking means of automating much of your fulfillment operations so you can keep personnel costs down and accuracy up. But, automation costs money and calculating the ROI on these investments can be tricky.
So when is doing one’s own fulfillment sensible? There are no exact answers, but in general, you should consider creating a self-fulfillment operation if:
- You make your own products and can produce at a variable output rate based on sales.
- You can only resell products if you purchase them wholesale, meaning the distributor or manufacturer has no dropship capabilities.
- Dropshipping prices and fees are more than it would cost you to fulfill yourself. Dropshipping vendors (we’ll cover them more in-depth a bit later in this installment) often have higher wholesale prices. Many also add additional fees for processing your orders to cover the costs of packaging and labor.
- Your shipping costs are very competitive. Dropshippers and 3PLs often have competitive, negotiated shipping rates with the major carriers. But, if you have shipping rates that are similar, you might improve your bottom line by doing your own shipping.
- Your products require unusual return or exchange policies. Think of Zappos for a moment. They grew to be one of the largest shoe retailers online by offering free returns and exchanges. No doubt, each returned pair of shoes had to be processed to see if they could be re-sold — a pretty labor intensive process. If you need to be involved in the return process or if you expect a high returns rate, you might be better off handling your fulfillment yourself. In the least, you may have to prepare to receive and process returns, even if you don’t do the actual shipping.
As you contemplate self-fulfillment, in terms of planning for efficient SMB ecommerce, you should seek out technology solutions that:
- Integrate seamlessly with your ecommerce platform. Orders should be sent to your fulfillment software for processing, while shipments and tracking information is returned automatically.
- Maintain inventory levels and synchronize with your ecommerce storefront and your accounting software.
- Process channel orders as they come in from Amazon, eBay and other sales channels.
- Are web-based and accessible even from outside your warehouse. You need to be able to keep tabs on this important aspect of your business.
- Accommodate a mix of warehouse and dropship products so you can extend your offerings for both.
The idea that you can take orders and have others fulfill them is quite attractive. In fact, many of the online stores with whom you shop are probably dropshipping purchases directly from the distributor to the consumer. Dropshipping has several key advantages:
- You have no capital tied up in inventory. No warehousing overhead. No over or under stocking.
- You can sell more products because you’re not limited to what you can buy and warehouse. You can use any number of dropshippers and offer their products to your customers.
But, like anything in life, there are downsides, as well:
- Wholesales prices are higher than buying straight wholesale in bulk. The dropshipper is taking the risk on inventory and is compensated for that.
- Shipping can be inflexible. While you might be able to “push through” an order for an anxious customer, dropshippers have to be much less flexible in order to manage orders from a wide variety of resellers.
- Inventory levels are often unknown. Unless you’re able to directly connect to a dropshipper’s system for real-time inventory updates, you may find that some orders cannot be fulfilled as expected when the distributor runs out of stock. At best, you may be able to download daily inventory updates to then import into your store. But, in fact, most dropship merchants simply offer products without inventory availability tracking and simply take their chances on whether the distributor has the products in stock or not. Too many out-of-stock issues, and you might be creating a customer service nightmare.
- You don’t know the products as well. If you’re buying products to fulfill from your warehouse, you have a hands-on opportunity to study the products, take your own product photos and test the products so you can really communicate their value to your customers. If you do sell using dropshippers, please consider buying the best-sellers yourself so you can learn them inside and out. You can always resell them as “open box” items on eBay, usually without losing any money.
As with warehousing, the stronger your integration for order processing, the better. We have found that many dropshippers are not very tech savvy. Your orders can only be sent to them via email or uploaded CSV file. Shipment information, when returned to you, must be manually updated in your ecommerce system in order to update your customers.
Fortunately, there are some developments in this space that are helping to provide better integration. Oberlo is a Shopify add-on that connects your store with vendors selling on AliExpress, the dropship supply component of Alibaba, China’s largest marketplace (think of it as the Amazon of China). When connected, your store can pull in product information and availability, shipping costs and pricing. Your orders will be automatically sent to the supplying vendor, as well.
Other dropshipping aggregators, such as Inventory Source, provide connectivity between stores and various dropship vendors. It connects to many different ecommerce platforms and channels, too.
I’m looking forward to seeing more and more distributors incorporate a more common connectivity technology that will facilitate the full-circle of products, orders and fulfillment.
One last note on dropshipping. If you do engage dropshippers, you will need a technology configuration that will distribute your orders to the proper dropshipper. For example, if a customer buys a shirt that is shipped from Distributor A and a belt that is shipped from Distributor B, your system must send the appropriate shipping orders to each distributor. One major downside to this is in the shipping costs you calculate for your customers. You may be pricing shipping as one package to the customer, but you’re actually paying for two shipments, one from each of your Distributors. If this is a common situation, you might end up losing a considerable amount of money!
For many merchants, the capital investment needed to build and operate a warehouse is more than they can risk. If you don’t have experience in running a fulfillment operation, meeting the demands of daily order processing can be more than you expect.
And while dropshipping has some short term advantages, growing ecommerce businesses — both B2C and B2B — look to third-party providers for fulfillment. These are called Third-Party Logistics companies, or 3PLs.
Vetting and working with 3PLs can be quite challenging, though, particularly for ecommerce newcomers. The biggest error many make is looking solely at the cost numbers instead of all considerations. It might be okay to save on overhead, processing and shipping, but if the 3PL is ill-equipped to handle your products or doesn’t integrate well with your ecommerce technology, you could end up spending more on labor and customer service.
Whenever you’re evaluating a 3PL, you should make a comparison based on the following criteria:
- Integration. Does their system talk seamlessly with your system, or will you be faced with manual updates for shipping, tracking and inventory?
- Locations. Are their locations convenient to your customer base? If you sell a lot on the West coast, but your 3PL is on the East coast, you’ll have larger than average shipping costs. Does the 3PL have multiple distribution locations? That can certainly help, but you will have to manage the allocation of your stock among their locations.
- Carrying costs. Every warehouse will charge you for the space your products occupy on their shelves.
- Shipping rates. Provide your prospective 3PLs with sample shipment parameters, with varying weights, dimensions and destinations. Ask them to provide you with shipping costs based on those parameters.
- Security. How secure is their facility? How do they prevent loss due to theft?
- Ingestion cost. Many will charge you to process inventory you send to them (or have shipped from your wholesaler).
- Returns handling. How do they handle and process product returns? What is their cost for this? Can they provide return labels?
- Packaging. Do they have the kind of packaging that will protect your products during shipping while also keeping shipping costs at a minimum? How do they maximize shipping efficiency to reduce costs?
- Product Types. Can they handle product bundles or kits that you may wish to sell on your store? How does their inventory manage these items?
- Simplicity. This is more of a subjective rating, but you should get a sense as to how simple they make their pricing, integration, communication and overall operation. I’ll always prefer simple over complex, even if it does cost a few pennies more. Complexity will drive up other costs, such as integration and customer service.
If you’re new to fulfillment, it really does pay to have someone help you analyze and map out a fulfillment strategy and process. You can easily lose lots of money if you’re not careful!
Fulfillment-By-Amazon — or FBA — is technically a 3PL. But on steroids. Whatever you may think of Amazon, you have to admit that they know shipping and distribution better than anyone. It’s the core of their business.
FBA is Amazon’s 3PL service that allows you to send your product to Amazon and have them fulfill your orders — whether or not you sell on Amazon. That’s right: you do not have to sell on Amazon to use FBA. Furthermore, FBA can make your life much easier.
Just consider some of the advantages:
- Simple fee schedule. FBA pricing is straightforward and easy to understand. Compared to many 3PL pricing schemes I’ve seen, it’s easier to calculate your actual shipping and handling costs with FBA.
- One ingestion location. You can ship your products to one Amazon fulfillment center and Amazon will take care of distributing it throughout their network according to their algorithms. There is a small additional fee, but your customers can receive their products faster since there’s a greater chance the items will be shipped from a close Amazon center.
- Access to 75 countries & regions. No other 3PL in the world can provide that level of international coverage.
- Amazon Prime shipping. You get to take advantage of free Prime and free general shipping if you offer your products on Amazon. That could be a huge savings for you! For sales from your website or other channels, shipping is included in their flat-rate charges.
- Amazon provides customer service. Amazon’s staff will handle all shipping-related customer service, including returns and refunds. Another overhead savings for you.
- Broad integration with ecommerce systems. Almost every SMB platform provides integration with Amazon and FBA, including Shopify, BigCommerce and Magento. These are pretty seamless integrations that will make your shipping easy and convenient.
Now, nothing is ever as good as it seems, and with FBA, there are some serious considerations:
- More stringent requirements. For your products to be processed by FBA they have to meet all the same requirements as selling on Amazon, including UPC or MPN numbers, ASIN (Amazon’s item number), categories, etc. Read carefully the requirement pertaining to various classes of products, as well.
- Shipping to Amazon can require an extra step. If your supplier won’t package and ship your products according to Amazon’s ingestion requirements, you may have to do that. Amazon does provide guidance and resources for materials, but you have to adhere to their exacting rules for how you ship your items to them.
- Setting up and configuring an Amazon seller account can be complicated. I’ve never felt Amazon made their seller account portal as simple as it could be. It’s awfully confusing to first-timers.
But, despite the challenges, once you get it all set up and humming, you may find it an extremely powerful asset to your business. For me, the best part is the pricing simplicity. When calculating margins and prices, Amazon makes it very easy to run cost analyzes. In addition, if you charge your customers for shipping, you can use a simple flat-rate schedule instead of complex or real-time shipping rates from carriers. By adding a few simple formulas to a product spreadsheet, you can easily calculate your Amazon shipping costs based on the weight of the product. Except for international shipments, destination is no longer a consideration in calculating shipping costs.
Figuring It All Out
While you may have heard me say that ecommerce is the most complicated form of directing selling, it’s also true that shipping and logistics is the most complicated part of ecommerce. It’s the part of online selling that most merchants find confusing, costly and, therefore, contributing the most risk to their operation.
Shipping — or more appropriately, logistics — is more than simply putting products in a box, slapping on a label, and handing it to the UPS driver who picks up your packages. For an online business to be fully successful (and Fortune 500 companies grapple with this every day!), you have to plan, implement, test and adjust the following:
- Shipping pricing. This is what you charge your customers. And it’s largely based on your competition, too. If all your competitors are offering free shipping, then you’re pretty much going to have to do the same. What you pay in shipping is a different, yet important, discussion. We’ve tested several strategies on charging for shipping, and it’s still a fluid subject based on product, destination, competition, and customer expectations.
- Carriers. Many newcomers to ecommerce don’t realize that carriers have published rates, and they have negotiatedrates. If you have a larger operation or can project with some certainty your shipping volume, you can negotiate shipping rates with UPS, FedEx and others. Don’t hesitate to ask for deep discounts, as we’ve seen even smaller operators gain discounts of 40% or more.
- Packaging. Today’s shipping costs are determined as much by the dimensions of the boxes you use as they are the weight. This is called dimensional rating. That’s why you’re seeing more and more packages using padded envelopes and less “peanuts” or cushioning. You have to be smart about the boxes you use.
- Returns handling. Please give careful thought to your returns and exchanges strategy. It cannot be lightly considered or you’ll end up with customer service complaints (with their accompanying social media screeches, as well).
- Inventory turn. Ask your accountant about this one. She’ll want to help you minimize the amount of capital you’re tying up in inventory.
The bottom line is that while fulfilling orders is what brings happiness to your customers and satisfaction for you, it’s a very complex area of ecommerce. We’ve been through it so many times, but yet each time we still step back and do a full assessment of the entire situation in order to recommend or manage the logistics part of a clients operation.
And we continue to work on it with clients each and every year.