Any business that regularly ships products to customers should count fulfillment as one of its most crucial processes. The appeal of a high-quality product can rapidly evaporate if its fulfillment isn’t up to par.
When we talk about ‘Fulfillment’ we’re talking about a multi-phase process encompassing product storage (inventory management), picking, packaging, shipping and returns management. A business can perform these actions in-house or outsource to a third party. To choose the right option for your business, you must understand what each entails.
WHAT IS INSOURCING FULFILLMENT?
Insourcing fulfillment involves processing all customer orders on your own within the business premises. Most businesses start out this way when they are small. For example, you could label, wrap and package orders from your garage, basement, or office space. This is also an option for large businesses who can have space and personnel dedicated to processing and sending eCommerce orders.
PROS OF INSOURCED FULFULLMENT
If you are just starting a business, knowledge accumulation should be one of your biggest goals. Customer and market knowledge can be the difference between success or going out of business. By taking charge of the fulfilment and staying as close to those processes as possible a business can gain granular insights into every major facet of eCommerce fulfillment and its customers.
They can then use that intel to innovate and make changes to products and processes early on before too much money is invested in scaling the business (the wrong way).
Real-time product engagement and inventory
Managing your inventory provides an unrivalled real-time view of those holdings. The daily, hands-on engagement gives you a detailed understanding of the stock you hold and its quality. Third parties may provide warehouse management systems and other applications, but they cannot capture every aspect of your inventory as well and as quickly as your hour-by-hour interaction with it can.
Customisation & Control
Doing fulfilment yourself also allows you to customise the process on an order-by-order basis. Small, businesses may want to add a personalised note from the founder or take extra effort in the packaging process. For example, it’s unlikely a third party fulfilment provider would be able to add ribbon or a small gift into every order! It can also be more cost-effective to opt for low-to-medium quality packaging for some items/orders and high-quality packaging for others. You can also change shipping carriers on a case-by-case basis depending on which delivery channel offers the most optimal freight rates in general.
CONS OF INSOURCING FULFILLMENT
For all of its cost savings, insourcing’s main drawback is time. Fulfillment will have immense demands on your time. This is time that would otherwise be expended on marketing, product development, and other activities that grow your bottom line. Think about the total hours spent each month wrapping and labelling items or waiting in line at a post office or carrier’s office. It’s also likely not a core capability and others with greater scale and more experience can carry out these processes far more efficiently.
Budgets can spiral
Inefficient use of time is one of the reasons insourcing is more expensive than outsourcing over the long term. But it isn’t the only one. Chances are that as a business owner, you won’t be doing the work yourself. One or more employees will run with the process, something that will constitute a significant recurring expense.
Further, you could be paying more than you need to on packaging and shipping. As a small business, you might not enjoy discounts that come with bulk purchases of packaging materials and shipping. While insourcing gives you control over some cost aspects, once that starts to spiral out of your control it’s hard to reign things in. In many instances, what started as a cost-saving measure becomes a drain on time, team, and resources.
Higher risk of error
For a small business, insourcing spreads your time and human resources thin. Staff responsible for fulfillment may also be charged with other work obligations. This multitasking heightens the risk of tasks falling through the cracks. One study found error rates rose to 50 percent when workers multitasked.
WHAT IS OUTSOURCING FULFILLMENT?
In outsourced fulfillment, the business delegates the process to third-party experts. The third party manages inventory, storage, processing, packaging, and delivery. They also take care of returns, exchanges, and in some cases, minor product repairs.
PROS OF OUTSOURCING FULFILLMENT
Outsourcing fulfillment will cost you through the fees you pay for the service. Long-term, however, this cost can be significantly lower than the direct and indirect expenses you would incur when handling the process on your own.
Third-party providers have economies of scale. They split the cost of warehouse space, boxes, delivery, and employee remuneration between multiple clients and can therefore charge an affordable fee.
Insourcing may work fine when you have a trickle of orders, but as order volume and complexity grow, it becomes harder to keep up. You need bigger and more sophisticated warehouse space, machinery, staffing, and carrier capacity. Outsourced fulfillment is scalable. Providers already have the capacity – all you have to do is ask and pay for it. You can scale up and down as and when you need to!
More time for strategic planning
Fulfillment pulls your mind and energy away from thinking about the things that grow your business and profitability over the long term; creating new products, venturing into new markets, negotiating vital partnerships, reengineering business processes, crafting customer surveys, and more. Outsourcing takes the dreary, repetitive, and time-consuming routines of fulfillment out of your hands.
CONS OF OUTSOURCING FULFILLMENT
Costly at the start
Outsourcing may seem overly expensive at the beginning. This is especially so if you had invested in an insourced fulfillment operation. It may also not appear financially prudent if your business does not have a steady and substantial flow of orders. However, if you have significant order volume, you should generate a positive ROI even considering any startup and management costs within the first year of outsourcing your fulfillment.
Fulfillment providers typically offer a standardized, mass-market service. There is less room for packaging and delivery customization compared to insourced fulfillment because your partner will want to standardize as much of the process as possible. When customization is available, you may have to pay extra for it because the third-party provider has to hold extra packaging, tape, boxes, and other materials needed especially for your business.
Startups and small businesses do not have the luxury of operating in a vacuum. From the get-go, you are thrust into competition with large, established players. To distinguish and grow your company, providing a fulfillment service that is at or nearly at par with your larger competitors is paramount. You can do this by insourcing or outsourcing the process. Evaluate your business goals and requirements then choose the fulfillment path that best leads you to it.
Jake Rheude is the Vice President 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.