Monday, May 23, 2016

Lesson #236: E-commerce Fulfillment Strategies

Posted By: George Deeb - 5/23/2016


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E-commerce is one of the digital tech spaces I follow more closely than others, given my natural love of B2C startups.  In the past, I have written about how to grow your e-commerce company and the best e-commerce platforms for small businesses.  This post dives into the various fulfillment strategies to consider for early-stage e-commerce companies.  To help me here, I solicited the help of Connor Gillivan, an expert in the e-commerce space.  Connor authors an e-commerce blog and is the CEO at eCommetize, which helps e-commerce companies build and manage their online stores.

Defining the Types of Fulfillment

At the end of the day, your goal is to get your product to the customers that are interested in buying it. In certain scenarios, you will be the manufacturer of the product, while in others, you will be the retailer selling other people’s products. There are three main strategies that you can take to move the product to the end customer:

Strategy #1: Self Fulfillment

In this first strategy, you take full responsibility for the shipping and fulfillment process. A customer places an order on your website, you process the order, find the product in your warehouse, attach the shipping label, and give it to the shipping company for delivery. In this case, you either stock your products in your own warehouse or you have enough space in your office where you can run your fulfillment. This strategy also requires that you have a team of individuals solely focused on order fulfillment and physical inventory management. There are many pieces of software that can make the system simpler, but you will still need someone on your team to specialize in the work.

  • Complete control over fulfillment process
  • Access to larger brands that only offer wholesale purchasing
  • Extra costs to purchase products, warehouse, and labor up front
  • Can only sell what you have in your warehouse

Strategy #2: Third Party Fulfillment

In this second strategy, you team up with a third party fulfillment company (e.g., Amazon FBA, Shipwire, or Shipstation), so that you are not fully responsible for shipping the product to the end customer once you have received orders through your site. If you are the manufacturer of the product, you make the product and have it shipped directly to the third party fulfillment warehouse. If you are sourcing the product from a variety of manufacturers or distributors, you purchase the products from them in bulk and ship it directly to the third party fulfillment center.

Once the products have arrived at the third party fulfillment center, they become responsible for shipping each product to the end consumer as you communicate orders to them from your website. You are responsible for processing orders through your website and communicating the customer/shipping information to the third party fulfillment company, so that they can ship it to the correct customer.

In this case, you lose the need for someone on your team that will specialize in fulfillment and shipping operations. However, you will need someone who is solely responsible for communicating with the fulfillment company so that everything runs smoothly. Most third party fulfillment companies now have software that can link directly to your online store making the order fulfillment process simple and efficient.

  • Having fulfillment experts handling your order fulfillment
  • Discounted shipping rates because of third party fulfillment shipping volumes
  • Access to larger brands that only offer wholesale purchasing
  • Additional costs of storage, fulfillment, etc. dependent upon the third party fulfillment company that you decide to work with
  • Can only sell what is at your fulfillment center

Strategy #3: Drop Shipping

In this third strategy, you work directly with manufacturers that have the ability to ship their products directly to the end customer. This particular strategy makes it so that you never have to touch the product as the online retailer. You are responsible for obtaining the correct product data to list the manufacturer’s products on your online store and they are responsible for shipping the product to the end customer. As you receive orders from your website, you communicate them to the correct manufacturer.

Although it may seem like the simplest option for running your online store, the drop ship fulfillment strategy calls for a greater deal of data management. If you are working with a large number of manufacturers through drop shipping, your team will be tasked with keeping your product’s inventory status updated, communicating with a large network of manufacturer reps, and creating a system to efficiently communicate orders.

  • Ability to sell products without touching them
  • Ability to have larger inventories or test products until you find the best selling ones
  • Lower product wholesale discounts and drop ship fees
  • Need to manage inventory feeds from manufacturers you are working with
  • Can only work with brands that have drop ship capabilities

Making a Fulfillment Strategy Decision

All three options for fulfillment can and are utilized by profitable retail companies around the world. Before Amazon had its own fulfillment warehouses sprinkled strategically around the world, they were drop shipping products to the customers. The strategy of fulfillment that you choose to grow your business will very much depend on your short and long term goals.

By weighing all of the factors above, you should be able to make an informed decision on which fulfillment strategy best meets your needs as a growing company. Are you making your own product and interested in distributing it through your website and online marketplaces? If you can afford it, working with a third party fulfillment company may be the best option so that you can focus on continuing to produce new iterations of the product.

Do you have a strong following online already that is interested in a specific niche of products? If you know the products that your customers already want, it may be best to stick to self fulfillment or third party fulfillment, so that you can get access to the larger brands. You can hand pick an inventory you want for your online store, purchase the products, then decide on the best method to fulfill.

Finally, are you a growing online store looking to expand your inventory into new product niches without the initial investment of buying products in bulk? If so, the drop ship fulfillment strategy is a great option to test the waters and move forward with which products sell best.

Thanks again to Connor Gillivan for helping me with this post.  Be sure to follow him on Twitter at @ConnorGillivan for future learnings.

For future posts, please follow me on Twitter at: @georgedeeb.

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