The views expressed here are solely those of the author and do not necessarily represent the views of FreightWaves or its affiliates.
In-house fulfillment is a natural fact of life for most startups and early e-commerce businesses. Initial sales can be packed in a garage, but one viral hit or a typical peak season can quickly lead to scale issues. Businesses can avoid surprises that lead to delayed orders and stockouts by outsourcing fulfillment to companies that guarantee speed, accuracy, and room to grow.
Minimizes peak capacity
The most top-of-mind threat that in-house fulfillment creates, especially for smaller e-commerce companies, is the risk of losing the carrier capacity that they need. During peak, most companies will see their capacity capped. If in-house operations only are large enough to support one carrier, then this cap can make it hard to fill orders and even put the business at risk of higher cancellations and returns because of delays.
Outsourcing fulfillment to a third-party logistics (3PL) provider makes it easier for shippers to use multiple carriers. The 3PL can leverage its entire monthly volume to collaborate with multiple carriers and enable them on the account. You may also be able to include regional players like OnTrac and LaserShip – becoming one network in 2022. That gives the e-commerce business a greater chance of fulfilling all orders before you run out of available capacity.
Keeps costs high
Another benefit of the volume of outsourced fulfillment is its negotiating power. Most carriers provide discounts based on volume, and the higher, the better. What’s more, though, is that discounts, fee reductions, and other cost-savings negotiations can be based explicitly on product attributes.
3PLs that specialize in specific products, such as bulky goods that typically have an additional handling fee, often negotiate to reduce or remove those fees. Instead of pursuing savings that apply across the board, the 3PL could seek better rates that only apply to these bulky items. This approach allows the 3PL to focus its efforts and own investments on handling that specific product type.
The 3PL will have a better chance of reducing these fees or negotiating a better DIM weight divisor because they have a significant volume of bulky items. An individual e-commerce store may not have a high enough volume to do the same for the carrier. Specialized 3PLs also tend to have a mix of order sizes and weights, making it easier to fill up a trailer. That provides an additional incentive for the carrier to play ball.
Reduces available expertise
Moving away from the carrier consideration, a 3PL also helps the business save by reducing the costs of fulfillment processes. Think of the economies of scale. Fulfillment companies offer the same services to multiple companies. This allows them to specialize in processes or invest in reliable equipment to improve efficiency and spread-out costs across many orders. As efficiency improves, so does the potential for savings.
Improved processes can also be significantly safer operations. In-house fulfillment teams need to be safety experts, meet OSHA requirements, and develop training for new equipment, SKUs, and operations. That can be difficult to offer as an e-commerce startup because it’s not the core focus during initial hiring and scaling days. Grow too large without developing that expertise, and the risk of a severe accident that harms the people the business depends on daily increases.
Outsourcing fulfillment not only protects people but shifts the costs associated with training, certifications, and more. The 3PL also manages insurance costs, which the insurer may reduce thanks to the 3PL’s expertise and warehouse safety equipment. The e-commerce business gets access to experts and best practices at a fraction of implementation costs.
Put sales at risk
Fulfillment plays a role in e-commerce growth and scalability, including in conversion rates. The Baymard Institute tracks shopping cart abandon rates, noting that the average e-commerce store has a rate just below 70%. Fulfillment directly impacts that rate when people say that added costs such as shipping make them abandon the cart (49%) and when shipping would take too long (19%).
In-house fulfillment can struggle to tackle these issues. To avoid sticker shock, the e-commerce business needs to absorb more of the shipping and fulfillment costs or bake them into product pricing, hoping that they won’t harm sales. Then, figure out how to ship things faster without seeing the customer’s expense going right back up again.
Outsourcing fulfillment makes it easier for e-commerce brands to offer faster and affordable shipping options. It allows the business to also start to make guarantees on speed and accuracy. Not only does that help keep customers and avoid cart abandons, but it’ll help prove the reliability needed for marketplace programs, like Walmart’s TwoDay Delivery program and badge. A useful partner that spreads out fulfillment costs and lowers carrier pricing can help the company offer customers the pricing, speed, and programs they want.
For today’s e-commerce businesses, fulfillment can either protect or cost sales. These are just a few of the reasons why outsourcing instead of keeping it in-house can protect your bottom line and help you scale.
About the author
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.
