From in-house fulfillment and Amazon FBA, to dropshipping and 3PLs, we evaluate each model to help you pick the right one for your business
Imagine the scenario: you’re a multi-channel ecommerce seller, surrounded by stock, wondering how you’re going to get orders out. You sell a whole range of SKUs, that vary in size and sales volume, and aren’t sure whether fulfilling all your orders yourself will be possible.
While self-fulfilling orders does have merit, it’s not the only way to do ecommerce fulfillment. There are several other strategies, each with their own pros and cons, that are worth exploring.
So, in this post, I’ll look at the different ecommerce fulfillment strategies that are open to sellers, from in-house fulfillment and Amazon FBA to dropshipping and using independent 3PLs. I’ll explain how each model works, the pros and cons of fulfilling orders using each approach, and the types of businesses which are best suited to each model.
In-house ecommerce fulfillment
The first method, is to fulfill orders yourself, in-house. This means that you are responsible for the whole fulfillment process, from receiving stock, to picking and packing orders when they come in, and arranging for products to be shipped to buyers.
The smallest sellers may use this approach from an office or their own home, but it’s more likely that sellers will self-fulfill orders from a warehouse. Here, they will be responsible for inspecting and cataloging inventory when it arrives, and placing it in the right place in the warehouse.
When orders come in, the seller will have to print a picking list, find the items in their warehouse and package them, ready to be shipped. It’s then a matter of arranging for a carrier to collect the orders, sending tracking information to the marketplace or shopping cart where the order was placed, and updating the buyer.
Often, the main reason that sellers want to fulfill orders themselves, is to maintain control over how their products are handled, packaged and shipped. They can see all their stock right in front of them, and easily keep in touch with how it’s being treated on a day-to-day basis.
Perhaps they sell fragile products that need to be prepared in a certain way, or want to add marketing material like fliers to orders. That’s all under their control and can be changed it any time, for any reason.
In-house fulfillment is also gives sellers maximum flexibility over kitting and bundling products. For example, if they want to bundle single notepads and sell them as a pack of five, they can, but they also have the freedom to sell them singly. Some 3PLs offer bundling and other custom services, but FBA does not – you have to send the bundle in, packaged together, and it can then only be sold as a pack.
Cost is a complex issue here. In-house fulfillment might be more or less expensive than other options, depending on the situation of the specific business – more on that below.
In-house ecommerce fulfillment is not easy, as having to store and handle your stock requires a lot of time, effort and space. There is also a great deal of hidden work, besides picking and packing, that sellers don’t always consider, such as the admin of processing incoming stock, the logistics of managing warehouse space, logging the location where each product is stored and so on.
In fact, in-house fulfillment can be a recipe for chaos, as sellers try to cram more and more products into their warehouse. The shelves are filled to bursting point, new deliveries pile up by the doors, and the ends of each row become home to boxes upon boxes of disorganized stock.
This isn’t down to lazy or bad sellers. It’s because space is at a premium. As demand grows, or they take on more SKUs, the size of the warehouse doesn’t change. Sellers likely have a lease on their warehouse, meaning they can’t move premises easily, and it’s often not possible to rent additional adjoining space.
Often, in-house fulfillment can be more expensive than you expected, due to high fixed costs and inefficiencies in the fulfillment process. And, if you need to be involved in managing logistics and order fulfillment, you’re spending less time in the areas where you add the most value.
For large volume sellers to get over this, and become as efficient as possible, technology is a must. Using inventory management and warehouse management software and hardware such as scanners, will help to speed up the process, and give you a better handle on operations, from receiving stock, to sending out orders.
On a different note, a common complaint about in-house fulfillment is that you won’t get a Prime badge on your Amazon listings as you would if you were using FBA. However, this isn’t insurmountable, as if your metrics are good enough, and you meet Amazon’s other criteria, you might be eligible for Seller Fulfilled Prime.
Through this program, you can fulfill orders from your own warehouse, and be eligible to display the Prime badge on your listings. This means that you can get the same Buy Box boost without having to send your stock to FBA.
Who is it right for?
In-house ecommerce order fulfillment is really best suited to sellers that are doing predictable, low volumes, that aren’t suddenly going to spike. This way, the level of order processing is manageable and shouldn’t rapidly outgrow the space you are using.
Equally, it can be very well suited to brick-and-mortar shop owners, who have their own premises and existing staff, because the extra cost is minimal. They already have the stock there, and staff from the store can use quiet periods of the day to pick and pack orders.
Sellers should also consider their geographical location and that of their customers. If they already have premises close to most of their customers, making use of them for ecommerce fulfillment may be the best way to get orders delivered quickly. For example, if your warehouse is on the East Coast and so are the majority of your customers, a well-run operation should get your products to them quicker than if your stock is in Amazon’s Fulfillment Center in Sacramento.
Using it effectively
In-house fulfillment becomes more difficult and more technical as a business increases in size. So, lower volume sellers, who only offer a limited number of SKUs, may be able to fulfill orders efficiently without too much investment. For example, they might not have the need for a warehouse management system, or a large team of staff.
As the business grows, fulfillment becomes a bigger operation and can soon become chaotic if good processes and systems aren’t put in place. At this point large sellers need to consider best practices for running a warehouse, such as:
- The picking method that they’re going to use
- Which parts of the ecommerce fulfillment process they’re going to automate
- How to optimize their warehouse layout to reduce mistakes and increase efficiency
By using FBA (Fulfillment by Amazon) sellers can pass the storage of their products, and the handling and shipping of their orders, on to Amazon’s staff.
The first step, is to get inventory prepared for sending into FBA, this involves labeling and packaging it in line with Amazon’s rules. You then send the stock off to one of Amazon’s Fulfillment Centers.
When your stock arrives, they process it, and store it in their Fulfillment Center. When an order is placed, Amazon’s staff pick, pack and ship orders straight to the buyer.
The main benefit of using FBA depends on the type of seller you are. If you’re a small seller, then the fact that you don’t have to store hundreds of SKUs, or handle and ship stock is a huge bonus. Better still, if you’re using FBA and selling those products on Amazon, they’ll also take care of customer service, and handle returns.
By taking those tasks off your hands, it gives you time to focus on the areas where you can add the most value. It also means that you have a smaller, leaner operation to oversee.
By using FBA, sellers will be eligible for Amazon Prime and the Prime badge will be added to their listings. This helps them win the Buy Box more often, and can help to increase sales, sometimes quite dramatically.
Success stories abound of entrepreneurs growing their business exponentially using FBA, but it is not a recipe for “easy money” that some people might have you believe!
Choosing FBA also eradicates any worries you have about scalability. As long as your products are eligible for FBA, Amazon’s Fulfillment Centers will always have more than enough room and man power to deal with any spikes or long-term increases in demand for your products.
A big plus, especially for beginners, is that FBA is a straightforward service. While it does have its intricacies, the overall process is relatively straightforward – you prepare your stock, send it to a Fulfillment Center and Amazon takes care of the rest. Amazon leads the world in quality of service, so you can be confident that your orders will be processed quickly and correctly.
FBA also doesn’t have minimum stock requirements, so if you’re just starting out, with only a little stock, you can still use it. This isn’t always the case with 3PLs, as to get the best prices, you need to be a decent sized seller, with a lot of stock.
Possibly the biggest drawback of using FBA is the lack of control that a seller has over their inventory. Amazon are all about efficiency so orders are all picked, packed and shipped in the same way and in the same packaging. Offering any additional services to add personal touches to orders is out of the question, as when it comes to FBA, it’s Amazon’s way or the highway.
The lack of control that sellers have over their inventory goes further. If they were to become suspended from Amazon, decide to sell elsewhere, or need to liquidate their stock, they would have to pay removal fees to have their stock returned, which can be costly.
There is also the risk that there stock could be commingled. This is where Amazon pools identical products that have been sent in to FBA by different sellers. The problem with this is that when someone orders a product from you, they may actually receive someone else’s stock. And, if that stock is faulty or counterfeit, it reflects on you as the seller and can have implications on your metrics.
Another aspect of FBA that sellers need to be careful of is storage fees, as these are especially complex and can easily trip sellers up. One thing to be aware of, is that in peak season (October to December) monthly storage fees increase by almost $2 per cubic foot.
It’s also important to keep an eye on long-term storage fees. Twice a year, Amazon has an inventory clean up and levies surcharges on stock that has been in the Fulfillment Center for between six and 12 months ($11.25 per cubic foot) or over a year ($22.50 per cubic foot).
Multi-channel sellers should be aware that in addition to the usual storage fees, Amazon charges higher Multi-Channel Fulfillment (MCF) fees for fulfilling orders placed on other sales channels.
If you use multiple ecommerce fulfillment strategies, such as combining FBA with in-house fulfillment or a 3PL, you might need to buy stock in higher volumes to maintain sufficient inventory levels in each location. Some inventory management software can help manage inventory levels in multiple locations.
With FBA, you still have to handle the logistics of getting stock into Amazon’s fulfillment centers, and it isn’t just a case of throwing all your inventory into boxes. There are strict rules surrounding FBA prep, especially regarding how you label and package your stock. It’s important to understand all the rules before submitting stock, or it will be rejected, and you’ll have to pay to have it returned.
Finally, U.S. sales tax is a complex issue for sellers using FBA. The widespread locations of Amazon Fulfillment Centers can give rise to sales tax nexus in many states. Online sales tax is a hot topic politically with ongoing changes and a lot of debate taking place.
Who is it right for?
Amazon FBA is a great option for beginners. If sellers are new to ecommerce and not really sure about logistics and fulfillment, FBA might be the best option. Sellers just need to be able to prepare their stock correctly. The barriers to entry are very low, as FBA is effectively a self-service option and doesn’t have minimum monthly fees or order volume requirements as most 3PLs do.
Businesses who only sell on Amazon, including private label sellers, should benefit immensely from using FBA. Because they are only selling on one channel, they don’t have to worry about high MCF fees, and they can gain a huge amount from the Buy Box boost that carrying the Prime badge can bring.
This isn’t to say that FBA isn’t suitable for multi-channel sellers. Sellers of high-value, high-margin products, should be able to afford the MCF fees and may decide that it’s simpler to fulfil all their orders using FBA than use different fulfillment methods for different channels.
For sellers with lower margins, using FBA in moderation can work well. They can pick their top performing products, that have good sales (or sales potential) on Amazon, and use FBA to fulfill them. Because their stock is moving quickly, they should have lower storage fees, and then can decide whether to fulfill orders from other channels using FBA, or a different method.
FBA can also work well for sellers that are looking to offer their products internationally, especially on Amazon’s European marketplaces. By using Amazon’s EU fulfillment programs (such as the European Fulfillment Network, Multi-Country Inventory or Pan European FBA) you can send stock to a single Fulfillment Center and then have Amazon ship your inventory around Europe. This is a cost effective way to get your stock closer to overseas buyers, while also benefiting from the boost that FBA and Prime give your Amazon listings, but beware of the VAT implications within Europe.
Using it effectively
If you’re a multi-channel seller with lots of SKUs, you need a strategy for using FBA. One approach, is to be selective and only use FBA for your best selling products. You may also only want to fulfill Amazon orders using FBA, and use a 3PL or your own warehouse to fulfill orders from other channels.
Amazon-only sellers with high-margin products have the option to adopt an all-in approach and use FBA to fulfill all of their orders. This way, fulfillment is taken off their hands, they don’t have to worry about high MCF fees and benefit from carrying the Prime badge on their listings.
Other sellers, who are concerned about long-term storage fees, or the high cost of removing stock from FBA if they have their account suspended, keep their stock with a 3PL or FBA prep service and send stock into Fulfillment Centers as needed. This way they avoid having too much stock tied up in FBA at any given time.
FBA is also a good way to test products, as sellers can send in a small amount of inventory, not have the hassle of handling fulfillment and yet still get a good idea of whether the product has potential on Amazon. Sellers could also do the same with Amazon’s global marketplaces, shipping a small volume into Europe, and seeing if their products have an international audience.
Before we get into this topic, let’s make an important distinction between two different ways that the term “dropshipping” is used in ecommerce:
- The conventional meaning of “dropshipping” is an order fulfillment service provided by suppliers (product manufacturers and distributors) where they ship products directly to the buyer.
- In more recent years, dropshipping is being used to describe an entirely hands-off ecommerce business model that is built upon finding suppliers who will dropship, and marketing their products on marketplaces and web stores. The seller doesn’t handle any products themselves.
In terms of choosing an ecommerce order fulfillment strategy, dropshipping is just one option among others, that might be available for some of the products you sell. It’s common in some product categories and rare in others. For example, it is the norm in categories where products are bulky and/or custom-made, such as furniture, and unusual to find for small high-volume products such as toys.
Whatever the product, dropshipping works the same way: after a sale is made the seller orders the product from the supplier and has them ship it directly to the buyer. The buyer pays the seller, and the seller pays the supplier, after the order is placed. No inventory is ordered in advance, so there is no initial outlay, although some suppliers have minimum order volumes.
With dropshipping you don’t hold stock, and your only role in the ecommerce fulfillment process is forwarding the order details to your supplier. For products that are dropshipped, there’s no need for warehouse space or staff to pick, pack and dispatch orders. If you only sell dropshipped products, there’s no need for a fulfillment operation at all.
This allows sellers to stock a wide product range. Essentially, the more relationships they can build with suppliers, the more products they can offer to buyers.
Dropshipped products are often bulky and expensive, so there are cashflow and storage space advantages in not having to buy stock upfront. Ideally, suppliers who dropship will bill in arrears, and have credit terms, so the seller can pay them well after they have received payment from the buyer.
Dropshipping offers sellers very little control over how orders are handled, packed and shipped. Sellers usually have no say in dispatch speed, packaging, shipping times and so on. They can’t combine orders for multiple products from different suppliers, or add marketing materials such as coupons.
With dropshipping, the quality of service is entirely down to the supplier. Some can be very good at the whole ecommerce fulfillment process, while others may run a chaotic operation with frequent mistakes. Marketplace performance metrics could suffer, because it’s your reputation on the line, not theirs.
Although order fulfillment is down to the supplier, you still need to send the order details to them. This can be a manual, time-consuming and error-prone process. You may also be responsible for customer support, including technical questions, and returns. The coordination between three parties can become slow and cumbersome, leading to buyer confusion and frustration.
Using dropshipping as an overall business model, and not just for fulfillment, comes with its own set of risks. Competition is high, because the barriers to entry are so low, meaning margins tend to be slim. As dropshipping businesses grow, handling orders can become an issue and some level of automation, or a team of virtual assistants, is often needed to help keep up with demand.
Who is it right for?
Dropshipping is a great fulfillment method for big, bulky, made-to-order products. A good example is someone who sells couches. They can’t store a whole range of couches in different styles, colors and fabrics in their warehouse. Instead, when a customer places an order for a two-seater, leather couch in bright green, they forward it onto their supplier, who manufactures and ships the order for them. Dropshipping is often the only practical way for this kind of product to be sold.
For new ecommerce businesses, dropshipping can be a good place to start. The barriers to entry are low, there’s no investment in infrastructure, and there’s no minimum level of stock required. All you need is a supplier that is happy to dropship orders on your behalf and you’re away.
Using it effectively
A common misconception that sellers have about dropshipping, is that it has to be all or nothing – this isn’t the case. As with all of the strategies we cover in this post, you need to use it wisely and only for products where it’s the best fit.
Retailers who are using dropshipping to fulfill orders for certain products need to make sure that the supplier is proficient with the dropshipping process and can efficiently handle consumer orders. Some are only really set up for wholesale orders, and might agree to dropship without the right systems in place.
As you start to dropship more orders, the volume may become too much to handle, and some level of automation may be needed to make the operation run smoothly. This is usually in the form of a dropship automation tool that automatically forwards orders to the supplier. Sellers may use a standalone tool, or may find that an equivalent feature is incorporated in tools that they’re already using, such as order management software.
If dropshipping is the entire business model then the main focus needs to be on finding suppliers, building relationships with them, and growing your product catalog. This high volume approach to dropshipping can be very successful and the bigger your business becomes, the more attractive you become to suppliers.
Don’t be fooled by misconceptions though, as dropshipping is not an easy business model to operate. As you take on more products, the level of admin increases and it’s likely that you’ll need some help, to get orders to the correct suppliers more efficiently. This can be achieved either through dropship automation software, or through hiring a team of ecommerce virtual assistants.
The final option for sellers, is to outsource fulfillment to a 3PL – a third-party logistics company.
With this approach, all that sellers need to worry about is getting their stock sent into their 3PL. This is relatively easy, as you just purchase your stock and get it shipped directly to their warehouse, where your inventory will be unpacked and stored in line with their own warehouse management strategy.
The 3PL should have some level of integration with your order management system, so when you receive an order, they are alerted. Their team will then pick, pack and ship the order straight to the customer.
The primary benefit of using a 3PL is that by outsourcing your fulfillment, you’re essentially leaving it to the experts. This means that they should able to fulfill your orders much more efficiently, which can only be a good thing for your metrics, and more importantly, for your customers.
At the same time, it means that you don’t have to store inventory or handle stock. Your only involvement in the fulfillment process is getting your stock to the warehouse. After that, they handle the picking, packing, shipping and some will even handle customer service and returns for you.
This means that you’re running a small operation, without the stress of handling fulfillment, giving you more time to concentrate on what the business is best at.
Using a 3PL also offers better scalability than if you were to fulfill orders yourself. These services are designed with room for growth, so if your sales suddenly rocket, they’ll be space in their warehouse for your extra stock, and staff available to handle the increase in orders.
In fact, 3PLs are often very accommodating, especially to high-volume sellers, and may offer services like kitting and bundling, putting fliers in packages, or taking pictures of high-value items before they ship them.
But does all this come at an increased cost? Well, no, it should be cheaper than using multi-channel fulfillment through Amazon FBA, and may well be cheaper than operating your own warehouse. 3PLs operate on a large scale, and ship thousands of products each week, so their economies of scale, process efficiency and shipping agreements, for example, should all help bring down the cost.
An additional benefit is that 3PL costs are predictable and direct to each order, as opposed to the indirect costs, like rent or wages, that arise from having your own warehouse. This means sellers have a better idea of their exact margins and profit per item, which makes it easier to plan ahead.
Using a 3PL means that sellers don’t play any part in the fulfillment process, which naturally means they lose control over how the process is handled. This isn’t necessarily a bad thing, but if you have items that need to be handled and packaged in a certain way then you’d have to make sure the 3PL are willing and able to replicate it. Or, if you just don’t like the idea of handing over such a critical ecommerce business process, then you’ll have a hard time giving control to a 3PL.
Despite potentially offering more flexibility than FBA, 3PLs aren’t generally as accessible for beginners, or small volume sellers. You might need to provide the 3PL with a detailed brief of what you need them to do, rather than just following a standard process. Their pricing structure (for example their storage fees) can also be prohibitive for sellers with low amounts of stock.
Using a 3PL can actually work out more expensive than having your own warehouse, or using FBA, depending on the breakdown of their costs. Usually, 3PLs will charge a fee for receiving goods, storing goods, picking goods, packaging goods and then you have shipping fees. You need to make sure that you factor in all of these costs, for each of the SKUs you plan on sending in, and compare it to FBA fees and the costs of fulfilling orders yourself. Don’t assume it will be cheaper without running the numbers.
When comparing methods, it is always worth remembering the boost that your Amazon listings will receive from using FBA and being eligible for Prime. You won’t necessarily receive this with a 3PL, unless they are efficient enough to qualify you for Seller Fulfilled Prime.
If they don’t, you may choose to split your stock across FBA and a 3PL. As above, this may mean that you have to take on more stock, to keep up with demand at both locations, and need some form of inventory management software, to keep a handle on your stock levels.
As a final point, it’s important to remember that sellers still need to handle the logistical side of getting their stock to the 3PL. However, there should be far less admin involved compared to Amazon FBA, as inventory doesn’t have to adhere to such strict rules.
Who it’s right for?
To really benefit from using a 3PL you need to be a large seller as the larger the amount of stock you store and fulfill with a 3PL, the better the price you pay, as the cost is typically based on volume.
In comparison to FBA, 3PLs can provide multi-channel sellers with a more cost effective solution for fulfilling their orders. FBA charges sellers high rates for multi-channel fulfillment (MCF) whereas 3PLs fulfill orders for the same price, regardless of the sales channel. If your 3PL is efficient, sellers may even qualify for Seller Fulfilled Prime, meaning they essentially get the same benefits as using FBA, at a reduced cost.
For international expansion, using a 3PL is a great option, as it allows sellers to get their products closer to their customers and deliver overseas orders quicker. It can also work out cheaper than other fulfillment methods, as sellers can ship their stock overseas to the 3PL using a freight carrier, and then use domestic carriers (at domestic rates!) to ship orders to customers.
Using it effectively
There are a vast number of 3PLs out there, and many of them have different specialisms and charging structures. Some might have charging structures that are better for low SKU counts, some might specialize in handling luxury goods and others may cater for nutritional supplements or clothing. There is no “one-size-fits-all” policy and what’s right for someone else’s business, may not be right for yours.
You need to have a solid understanding of what you want the 3PL to do. They will often have a long menu of add-on services, so you need to be able to break the fulfillment process down for your products, and tell them exactly what you’re expecting them to do for you.
In terms of having a strategy for using 3PLs, picking SKUs selectively can be an effective approach, especially for multichannel sellers. Not only does this work out cheaper than using MCF if your stock is in FBA, it gives you more scalability for your top products than you are likely to have in-house.
So, it can be a good idea to send only your top performing products, that are becoming too much for you warehouse, to the 3PL and then fulfill your lower volume, slow sellers from your own warehouse.
If you’re planning to sell internationally, consider looking for a 3PL with a global fulfillment network. If your 3PL has warehouses abroad, this can make it easier to get your products to overseas customers. You can ship stock to their domestic warehouse, and they’ll forward it to their overseas locations. That way, you will only have to deal with one 3PL rather than finding different suppliers for different countries.
Let’s imagine a scenario again: you’re a multi-channel seller, browsing through your product catalog, which is split between different ecommerce fulfillment models. You’ve sent your 10 bestselling SKUs into Amazon FBA and have no worries about long-term storage fees, because you know they sell fast, especially with the big Buy Box boost that comes with Prime.
You don’t want the hassle of managing the fulfillment process, because your strengths lay in sourcing products and trying to build your brand, so the rest of your stock has been sent into a 3PL who are the right fit for your products and also have a global network to aid your international expansion.
There are though, some big, bulky items, that compliment your other products, which aren’t suitable for a 3PL or FBA, so you’re using dropshipping to fulfill those. You maintain a small capacity for in-house fulfillment to help you try out new products quickly. An inventory management system with multi-warehouse and dropshipping capabilities works in the background, routing orders to the correct location.
Ecommerce fulfillment doesn’t have to be all or nothing. It’s about creating a strategy that maximizes efficiency and cost, based on the type of products you offer and the velocity at which they sell.
Getting it right, whether that involves one fulfillment model or four, will lower costs, increase efficiency and improve customer satisfaction. But, above all, it will give you more time and a stronger foundation on which to grow your business.