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What Is a Fulfillment Center and Why Is It Important?
Updated: 2022-02-08 / Article by: Jake Rheude
When your customer makes a purchase on your eCommerce website, what happens next depends on your fulfillment processes. At first, you might receive every order and pick and pack each box in-house. But as your online business grows, you will probably want to outsource your order fulfillment to a fulfillment center.
What is a Fulfillment Center?
A fulfillment center is a warehouse designed to fill eCommerce orders. The fulfillment process focuses on preparing orders and shipping them directly to consumers.
Fulfillment centers include:
Receiving docks where inbound products come in, get logged into inventory and placed on shelves.
Shelving and pallets where items are stored awaiting fulfillment.
Packing stations where packers place orders in boxes and label them for delivery.
Outbound loading docks where warehouse workers organize outbound parcels for pickup by delivery companies.
Of course, most fulfillment centers also have offices and break rooms for staff. Because the online dashboard and shipping tracking are vital to fulfillment, fulfillment companies usually have IT professionals on staff to ensure the information flow is uninterrupted.
How Is a Fulfillment Center Different From a 3PL?
If you’ve heard the terms fulfillment center and third-party logistics or 3PL used interchangeably, that’s because they have the same meaning. Third-party logistics is another term for fulfillment. Fulfillment centers provide 3PL services.
Role of Fulfillment in eCommerce
Fulfillment is essential to eCommerce. Consumers are confident to order online because they trust they will get the products they order quickly and in perfect condition. Professional fulfillment centers have evolved to meet this consumer expectation. The right fulfillment center will make your business look good and impress your customers. You might even put some fulfillment expenses (such as custom packaging) into your marketing budget.
Fulfillment has grown and changed as eCommerce has grown. Fulfillment centers provide a broad array of services, although order fulfillment is still the heart of eCommerce logistics.
Think of your fulfillment center as an extension of your eCommerce team. Lean on their expertise for help with inventory management, shipping unusual items, solving packaging glitches, and much more.
What Services do Fulfillment Centers Provide?
Here are the services you can expect from your fulfillment center. Every 3PL will provide certain essential services. If you need additional services such as specialized storage or shipping, you might need to shop around to find the right warehouse to meet your needs.
Receiving and Warehousing
ECommerce companies usually send products to fulfillment centers by the container load or truckload or on pallets if they have less than a truckload. The products get added to the warehouse management system (WMS) at receiving, so the fulfillment center can track what it has in stock.
Warehousing is the storage function of the fulfillment center, but it’s not a static service. Products continuously move on and off the warehouse shelves. The fulfillment company is responsible for keeping track of the merchandise and ensuring it doesn’t get damaged.
You’ll pay a monthly fee for warehousing based on the amount of stock you have stored that month. Some fulfillment centers have other warehousing costs, including fees for placing inventory into multiple warehouses or based on the number of different SKUs you sell.
A hidden cost of warehousing is shrinkage. Shrinkage is the difference between the inventory you ship to the fulfillment center and the products available for fulfillment. The discrepancy can be caused by damage in handling, theft, or misplaced goods. Many fulfillment warehouses include a shrinkage allowance in their contracts, which means they don’t pay for loss or damage up to a certain percentage of your inventory. Look for a 3PL with a zero shrinkage allowance. Your profit margin will thank you.
Pick and Pack
When the fulfillment center receives your online order, its WMS generates a picklist. The picklist includes the products for that order and indicates where they are on the warehouse shelves. The picker pulls the products and places them in a bin.
The bin containing the order and the packing list goes to the packing station. A packer double-checks the packing list to make sure the correct items are in the bin. Then the packer places the products in a box or mailing envelope and adds infill, if needed, to protect the items during transport. The final step is to seal the box and attach the shipping label.
This pick and pack process is the essential work of a fulfillment center. A robust pick and pack system will yield a low error rate (which saves you money on returns) and efficient order fulfillment.
Pick and pack charges usually include a base fee for the order, plus a small additional charge for each item picked. You’ll also be charged for packing materials unless your products ship in the manufacturer’s packaging and don’t need an overbox.
Packed boxes go to the shipping dock. Most fulfillment centers have one or more pickups per day from the major carriers (FedEx, UPS, and USPS).
The outbound dock is the end of the fulfillment center’s work. Once orders leave the warehouse, the delivery company takes responsibility for the last part of fulfillment: bringing your orders to your customers.
Shipping is one of the most significant fulfillment expenses for many companies, but your fulfillment center may have a few tricks up its sleeve to save you money on delivery. Ask about shipping discounts and get help packaging your orders to reduce shipping costs.
Many fulfillment centers handle reverse logistics or returns. Rather than sending returns back to you, your customers can return products to the warehouse. There, staff can check the items for damage and even send you photos to help you assess whether you can resell them.
When your fulfillment company processes returns for you, it can speed the process and get refunds to your customers more quickly. It can also place items in good condition back into inventory so they are available for resale.
Inventory management is crucial to the profitability of your eCommerce business. Carry too much stock, and you might end up with dated items you can’t sell and put too much of your cash into merchandise that sits on the shelf. On the other hand, if you hold too little inventory, you could end up losing sales because you run out of product.
Fortunately, you don’t have to improve your inventory management by yourself. Some fulfillment companies offer inventory management services or apps. If you have questions or concerns about inventory management, ask your 3PL for assistance.
Kitting and Assembly
Some 3PLs offer kitting and light assembly services. Kitting is any fulfillment process that can be done ahead of time to improve order processing speed and accuracy. Kitting might be grouping a set of items into a new SKU to be sold on your website as a set, pre-packaging fragile merchandise for safe shipping, adding product labels or new packaging, or preparing subscription boxes.
Assembly services can be helpful if you sell items that ship more efficiently from the factory-packed flat. Some fulfillment centers can complete the assembly before shipping orders to your customers.
Specialized Storage and Fulfillment
In addition to these services, you can find fulfillment centers that cater to a variety of uncommon storage and shipping needs. For example, if you sell products that need temperature-controlled storage, such as food items, you’ll need a fulfillment center with cold storage space. Other special storage needs might include hazmat items or regulated products such items that contain CBD (abbreviation for cannabidiol).
3 Benefits of Outsourcing Your Fulfillment to a 3PL
Using a fulfillment center instead of shipping orders yourself can feel like a big step, but it also comes with enormous benefits.
Flexible Storage Space and Services
When you rent warehouse space, you have a fixed overhead cost all year, no matter how much stock you have on hand. With a fulfillment center, you pay only for the space and fulfillment services you need each month. Your fulfillment costs will track more closely with your revenue. Plus, if you experience a sudden increase in sales, your fulfillment center can quickly provide the extra space.
Professional Fulfillment Services
Professional fulfillment makes your business look good. You’ll have fewer returns and more happy customers when the pros pack your boxes.
Faster and Cheaper Delivery
When you process orders yourself, your point of origin for shipping might not be ideal. If you’re based on one of the coasts, your packages will take longer to reach customers across the U.S. Your shipping costs will be higher, too. When you outsource your order processing, you can find a fulfillment center or centers in locations that can reach more of your customers more quickly. Cheaper and faster delivery will win you more sales.
What Effect Does The Quality of Fulfillment Have on Your Bottom Line?
It’s hard to quantify the value of fulfillment services to your business. With quality logistics, you’ll get more positive reviews, more repeat purchases, and more brand loyalty. Your marketing dollars will go further because you’ll be able to retain more of your current customers. Over time, that can accelerate your business growth and improve your profitability.
How to Find the Fulfillment Center Services You Need
What is your business’s growth curve? If your sales are adding up quickly, a professional fulfillment center can give you the support you need to keep increasing your revenue. Think of it as adding an experienced logistics team without hiring any new staff.
When you look for a fulfillment center, make sure you find one that provides all the services you need to help your eCommerce business thrive. You can use this fulfillment company questionnaire to ensure that you cover all the bases. Finding a 3PL that is a good fit for your business model is the best way to ensure that you get the full benefit of professional fulfillment.
Jake Rheude is the Director of Marketing for Red Stag Fulfillment, an eCommerce fulfillment warehouse that was born out of eCommerce. He has years of experience in eCommerce and business development. In his free time, Jake enjoys reading about business and sharing his own experience with others.