By Carol Smith, director of Business Development, Fifth Gear
In a retail environment where customer loyalty is increasingly rare and customer expectations are higher than ever, merchants should be constantly searching for ways to improve the way they do business. For a retailer or wholesaler who sells online, the struggle to provide excellent value and an ideal customer experience without a physical presence can be difficult. The key to a successful ecommerce channel ultimately hinges on one important area-the warehouse. Your order fulfillment operations should deliver the right product to the right person at the right time, and there are several options when it comes to running your company's back-end processes. The three most popular strategies for handling pick, pack and ship operations today are in-house, drop ship and outsourced order fulfillment.
With an in-house fulfillment strategy, the online seller owns and maintains its own warehouse facility, hires, trains and manages the labor force for that facility, and performs all day-to-day operational activities, including receiving inbound freight, tracking inventory levels and processing customer returns. This approach provides retailers with complete visibility as to how operations are running, as well as total control over every aspect of their fulfillment process. This strategy works especially well for sellers with complicated products, such as those requiring extensive assembly, or with very specific storage and handling conditions.
The ability to control operations is a comfort to many merchants, but having complete responsibility also comes with drawbacks and risks. A commitment to an in-house fulfillment model means that the retailer maintains every step of the fulfillment process. When an online seller is considering keeping, or bringing, its fulfillment operations under its own roof, several questions should be addressed:
- Can I manage the time, effort and costs associated with upkeeping and staffing my own facility, as well as expanding or updating that facility as my business grows?
- Do I have the labor pool available to scale my staff during peak times?
- Most importantly, can I effectively handle the day-to-day demands of my company's back-end operations while still putting enough focus on other areas to continue growing my business?
If the answer to any of these questions is no, it is unlikely that an in-house fulfillment strategy will benefit your business and it might, in fact, harm your company instead.
Although in-house fulfillment is still a common operational strategy, retailers and wholesalers have become increasingly more comfortable with trusting their fulfillment processes to companies who have the knowledge and experience to ensure success.
Drop Ship Fulfillment
The drop ship model is relatively simple. The online seller takes the customer's order on its site, processes the order and then sends the information to a third party, typically either the product's original manufacturer or a wholesale partner, to pick, pack and ship the order. The order goes directly from the seller's vendor to the consumer without the seller ever seeing or touching it. One of the key benefits to drop shipping is that it creates very little need for a fulfillment strategy because every order shipped as well as each return processed is taken care of by the vendor who supplied the product. For this reason, drop shipping is an ideal strategy for small online sellers who do not have the physical or capital resources to maintain their own facilities and whose order volumes and SKU counts are not large enough to warrant financial investment in an outsourced fulfillment partner. Some online retailers actually use drop shipping as a complementary option to their in-house or outsourced fulfillment strategy. They can continue to offer additional SKUs that may be slow moving, bulky or expensive to ship and store without having to stock the physical products in their warehouses.
Drop shipping does not come without a few potential pitfalls, however. When a seller chooses this model, he turns complete control of each order over to the supplier. This means that everything from order accuracy to product condition and shipping speed, some of the most frequent topics of customer complaints, is out of the seller's control. Additionally, because drop shipping agreements are typically based on a per-transaction fee or a percentage of the order total, this can quickly become a costly strategy for online sellers with tight margins.
An outsourced fulfillment vendor manages all aspects of the seller's back-end operations, including receiving inbound product, stocking and replenishing inventory, hiring and training staff, managing labor, shipping orders, and processing returns. In many cases, a fulfillment provider also handles the seller's customer service inquiries within its own contact center. With this model, there is no outlay of capital for new warehouses, no cross-country searches to hire top operations talent, and no extensive training and investment in technology for the seller. Some fulfillment companies offer a seller additional value-add services, such as embroidery or engraving, which would require significant investment in infrastructure and expertise to implement in-house.
With the day-to-day operations handled by a trusted industry expert, business owners are able to concentrate on marketing and merchandising strategies that help them expand their company. In addition, outsourced fulfillment houses have shipment volumes significantly higher than most sellers, and therefore can access better freight rates and transit times on behalf of their retail clients, which leads to more discounts and faster shipments for the consumer.
Many online sellers approach the outsourced model with the ultimate goal of saving money. Although some companies do see cost reductions, the decision to use an outsourced provider should be based on the ability to improve operational performance, reduce potential roadblocks to expansion and increase focus on the growth of the business. With these factors in mind, it is extremely important to select a fulfillment company whose operations line up with your business's overall goals. A good outsourced fulfillment provider will view your relationship as a partnership, and will understand that their success depends on the success of the brands they serve.
Regardless of the method an online seller chooses to use, the ultimate goal of a successful fulfillment strategy should be to provide a positive, seamless experience from the time the customer clicks "Buy" to the time the package arrives on his or her doorstep. By asking the right questions and paying attention to the key performance indicators that matter to your company, you can make an informed decision on which strategy or strategies will best serve your business and, more importantly, your customers.
Carol Smith is the director of business development for Fifth Gear, a provider of order fulfillment, contact centers, retail technology and marketing services for direct-to-consumer retailers and manufacturers. Smith has built her professional career around the retail and technology markets, including roles as an online buyer and merchandiser, trade event director and ecommerce entrepreneur. Smith's extensive knowledge in the buying, selling, branding, marketing, and strategic aspects of online retail help her guide ecommerce companies to make the best operations decisions for their businesses.
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