Chapter 6

What is a Fulfillment Center?

Resources / What is a Fulfillment Center?

If you run an e-commerce business or online store, and especially if you’re scaling your business, there are many factors you need to think about regarding the company and its infrastructure.

There’s connecting with your customers, of course. While your website may be the hub for your sales drive, you also need to think about other things, such as offering an app that customers can access from any device. And, for marketing and communication, what platforms you will use to offer an omnichannel experience.

Customer satisfaction and brand image will always be important to you, too. Customers now make informed decisions about how they shop online and what sites they access. You want your online portals to be trusted as one of the best online retail outlets.

But, of course, one of the most crucial factors you need to consider is how you get goods to your customers. There are two major methods – in-house fulfillment and outsourcing to a fulfillment center.

When businesses have their own warehouses and dedicated warehousing team, they usually handle it in house for better quality control. However, when companies don’t have enough space to stock up inventory or human resources to fulfill orders, outsourced fulfillment handled by fulfillment centers is a better option.

But just what is a fulfillment center? How does it work? Does it offer a proven model that will help your business be efficient and improve the customer journey? What benefits will it bring you and does it offer significant savings? That’s what you’ll find out here.

What is a fulfillment center?

Prior to the advent of e-commerce, businesses used warehouses to store goods and in some cases to distribute from. As e-commerce began to develop, ‘warehouses’ no longer cut it. What was needed were centers that carry out different activities, at a whole new level. These are fulfillment centers.

So, your fulfillment center is the physical location(s) from which a third-party logistics (3PL) provider stores and fulfills customer’s online orders for e-commerce merchants.

For instance, Amazon runs fulfillment centers to fulfil e-commerce orders for Amazon sellers. This is the so-called Fulfillment By Amazon (FBA) service. This is a great enabler for smaller e-commerce outlets who do not want the worry and extra work of also having to manage the final link in the outbound supply chain.

It is also worth noting that not all fulfillment centers only do business to consumer (B2C) work. Some centers operate only in the business to business (B2B) sector, and some may operate a joint model. A good example of this would be a large wholesaler that supplies multiple products to small retail shops with physical locations, using a 3PL provider to fulfill those orders.

How fulfillment centers work

So, how exactly do fulfillment centers work? Let’s look at it step-by-step:

1. You send your goods to the fulfillment center

If a fulfillment center is going to fulfill your orders for you, it obviously needs to hold your stock. That means, once you’ve forecasted demand and decided which orders you’ll need the center to fulfill, you need to send the goods for the center to store.

As soon as a fulfillment center receives goods from a merchant, they’ll get logged—usually using SKUs. The third-party logistics provider running the center must track every single item. What’s equally critical is that the fulfillment service providers keep you—the merchant—up to date. Consistent, real-time communication ensures your inventory management system is always accurate—even when goods aren’t under your own supervision.

The fulfillment center then stores your products until such time as they’re needed. That may mean they sit on shelves or pallets, or perhaps get stored under specific conditions (cold storage, etc.), if required.

2. You receive orders & the center fulfills them

When orders start to flood (hopefully!) in, is when your fulfillment center will spring into action. The best centers will process orders swiftly and communicate with both merchants and end customers every step of the way.

That will likely mean sending order confirmation messages at the outset, and then further updates. For instance, the center should let you and your customer both know when an order has been picked and dispatched, and provide estimated delivery times.

Picking is also a key part of order fulfillment services. The best 3PL providers use cutting-edge pick and pack technology, to ensure each order is built and dispatched accurately. They will also package your orders in your own packaging or according to your specifications.

3. Delivery

We’ll get to the principal benefits of fulfillment centers a little later. When we do, though, the time, effort, and money they can save merchants on delivery is a biggie. Fulfillment centers specialize in shipping goods as efficiently and cost-effectively as possible.

3PL providers will have pre-existing relationships with major carriers and couriers, which your orders can take advantage of. That means savings on shipping costs due to economies of scale, and the possibility of a wider range of delivery options for your customers.

4. Returns & reverse logistics

When you work with a fulfillment center, it will also handle returns on your behalf. Customers will send items back to the center to get processed. The center then handles all aspects of your reverse logistics.

The 3PL provider should inform you immediately of any returned goods. They’ll then either dispose of them, if necessary, or return them to stock. Real-time updating of your inventory management system is key here, too. You must know as soon as possible of any stock returned to your inventory.

Assuming the customer needs a replacement product, the fulfillment center will handle this, too. Once again, the best 3PL providers will keep both merchants and customers updated at every stage of the process.

The difference between fulfillment centers and warehouses

People often get these two terms confused, perhaps unsurprisingly given that there is some crossover in their purposes.

A warehouse is most commonly simply a large building where goods, products, etc., are stored. They may be used by wholesalers, manufacturers, large retail chains, or anyone else in the logistics business, from transport companies to import/export organizations. Location-wise, they are most often found in industrial park areas or close to major transport links for ease of movement. A warehouse doesn’t serve external customers, making it different from a fulfillment center.

A fulfillment center enables merchants to outsource warehousing and fulfillment. Also, while warehouses tend to be passive centers, fulfillment centers are a lot more active. A warehouse’s main role is storage but in a fulfillment center, storage is only one aspect of their role. A fulfillment center handles the full order fulfillment process from order picking, to packing and shipping.

Fulfillment centers can now also handle a major portion of some aspects of customer service. They deal with exchanges and returns, some customer queries, and may even operate a dedicated contact center service on behalf of their e-commerce retail clients.

Warehouses may be climate controlled to offer cold storage for certain types of goods, and most will feature loading docks (for deliveries or pick ups). Depending on the size of the warehouse, they will often have forklifts for moving pallets and larger goods around.

Warehouse space will more often, but not exclusively, be used for longer term storage, while fulfillment centers are more seen as a shorter term stopping-point before goods are forwarded to customers. Also, operations within a warehouse tend to be fairly static for long periods, while fulfillment centers are a daily hive of activity.

In the majority of cases, a warehouse will have a single owner and user, but fulfillment centers, for the most part, are multi-user systems that will be utilized by multiple e-commerce businesses.

warehouse management system

Benefits of fulfillment centers

By outsourcing the order fulfillment stage of the online purchase process, you can see a number of benefits that can help you and your business:

1. Lower delivery costs

Many fulfillment providers have many years of experience in the sector. They may also have several physical locations at strategic points in different states or locations. This allows them to carry out tasks at far lower prices than you would get if you did all the work yourself.

And where they do not facilitate actual delivery themselves, they will have long standing relationships with existing delivery services that offer them low rates. Or, for ‘new’ routes, they will have special software that lets them access preferential rates or the ability and knowledge to negotiate lower shipping rates.

2. Experience

By outsourcing order fulfillment to a good fulfillment center, you are drawing on your provider’s many years of experience in providing this service.

These companies can not only help fulfill your orders in a timely and efficient manner, they can help you develop better systems of inventory control and management. So they can help you improve your business model and allow you to grow.

3. Reduce operating costs

Using a fulfillment center can see large reductions in your operating costs. By saving costs on warehouse space and staff, your money can go towards finding a good 3PL provider.

4. Space

The largest e-commerce companies may have extensive premises, but most – even long-established brands – have much more limited space. This can severely restrict your ability to store inventory and thus also restrict your potential for sales and profitability.

By utilizing an order fulfillment center, you remove many of these restrictions. It’s not only about actual space for the products themselves, remember, but also the materials needed for packing and shipping, from bubble wrap through to boxes and cartons.

5. Focus on what matters

Yes, of course order fulfillment matters, but it can be a time consuming area that may take your focus away from other aspects of your business. By using 3PL fulfillment solutions, you can continue to focus on the core of your business: sourcing and selling goods, building brand awareness, and bringing new channels and customers on board.

6. Choice

Third-party logistics providers serving the e-commerce industry are now commonplace. That means, as a merchant, you’re spoilt for choice. That’s no matter where you’re based, where the members of your target market live, or what you sell. Not to mention your budget.

That level of choice means that you can select the fulfillment provider that will best suit your business’ needs. The closer matched your chosen fulfillment company is to your specific demands, the less control you’re giving up by outsourcing fulfillment.

7. Better reach

When you first start your business, you may have a limited reach. If offering order fulfillment yourself, you may initially offer state-wide delivery. By letting your fulfillment processes be handled by an experienced fulfillment provider, you are removing any restrictions on your reach.

Caveats to using a fulfillment center

It all sounds delightfully easy, doesn’t it? You outsource your fulfillment processes, leaving you to concentrate on running and growing a successful e-commerce business. As with any business decision, though, there are some caveats to keep in mind when it comes to choosing to use a fulfillment center.

1. Lack of control

Using a fulfillment center means you’re outsourcing fulfillment. By definition, that means you don’t control the picking, packing, or shipping of each order. Giving up that control is a big step to take.

You must trust the 3PL provider that you outsource fulfillment to. Consistent communication and integration of systems can help in this regard. The best fulfillment centers will update you continually on the progress of orders and provide real-time inventory updates. That way, you’ll feel like you’ve ceded less control.

2. Service quality

We’ve already mentioned trust, but it bears repeating. When you use a fulfillment center, you’re trusting the company running it with a considerable chunk of your customer experience. Mistakes can happen to make that experience sub-par.

Staff at the center may pick orders incorrectly or orders could get missed altogether. This is a surefire way to upset your customers. Such instances of human error, though, could—and would—happen if you handle fulfillment in-house, too.

3. Lack of visibility

We’ve mentioned a few times already that the best 3PL providers communicate constantly with merchants. Without this constant communication, though, using a fulfillment center could cause issues of visibility.

Without updates and a stream of information from the fulfillment center, you lose visibility on orders and inventory. That may mean you can’t keep a customer properly informed on their order, or even that you oversell products that you actually don’t have in stock. These are circumstances that any merchant wants to avoid.

4. Siloed data

By handling your processes beyond the buy button, a fulfillment center will generate lots of valuable data. That will include information on how your inventory performs, levels of customer satisfaction (as regards products and delivery, for instance), most-returned items, and much more.

Such data can provide invaluable insights into your business that will inform your future planning. It simply mustn’t, then, be siloed at the fulfillment center. You’ll need to ensure that the information gets fed back to your in-house team.

centralized system

How e-commerce companies use fulfillment centers to their advantage

For nearly all businesses, there will be many benefits in using a fulfillment center. These cover the advantages that any size of e-commerce platform can gain by outsourcing the fulfillment process. For businesses undergoing growth and development, fulfillment providers can take a lot of the pressure off and allow you to focus primarily on core tasks.

Fulfillment warehouses will usually have the latest in technology to ensure efficiency. You can not only utilize that technology to make your business more streamlined, you can learn from your provider as to how to better manage inventory and enhance your supply chain at every level.

By having an efficient fulfillment partner, it also improves your scalability. If you are partnered with a business providing fantastic storage, packing, and shipping services, then you can spend more time on increasing productivity or sourcing new products to offer customers. It also lets you focus on your sales channels and platforms.

How to choose between a fulfillment center and warehouse

Making the right decision as to whether you can rely on your own warehouse or you need to use fulfillment services from a 3PL provider is vitally important. That decision will depend on a number of factors:

  • Demand. Where are your products most in demand? If there is a high level of international demand, then warehousing in partnership with a global shipping agency may be the best solution. For local, regional, and national demand, a fulfillment and distribution center will more likely offer you the best solution.
  • Human resources. If your orders get fulfilled at a fulfillment center, you don’t need a dedicated warehouse team of your own. That means you save on salaries, benefits, and other related expenditures. You don’t, however, have control over hiring or managing the individuals in charge of fulfilling your orders.
  • Inventory turnover and space. Some items may move faster than others. In-demand items may need warehouse storage and high levels of square feet in space. Your physical location, then, may not have sufficient room. In some cases, you may even opt for a warehouse and a fulfillment center.
  • Flexibility . Customers now expect more flexible delivery options such as BOPIS (buy online, pick up in-store) or more varied shipping carriers. Ask yourself: are you able to handle flexible fulfillment in house? If not, it’s better to take advantage of a good fulfillment center.

Deciding between warehousing and using a fulfillment center can be particularly challenging in this era of omnichannel retailing. For a company to own (or rent) its own warehouse represents a significant cost and should only really be considered if you are convinced it is cost effective and suits your needs and model.

Frequently asked questions

1. How much does a fulfillment center cost?

There is no set flat rate for fulfillment centers, and the charges you will face may depend on many factors. But to give an approximate idea, some of the possible costs are listed below:

Service Pricing type Cost
Receiving goods Flat rate $25 for first 2 hours
Storage Per storage receptacle

Per month: Pallet, $40. Shelf, $10

Picking & Packing Included in final costs Around $0.20 per pick
Packaging (standard) Included in final costs Free (for specialist or customized packaging, rates will vary)
Kitting fees Per project Starts at around $0.40 per kit
Shipping delivery Normally passed directly to client Will vary depending on multiple factors: weight, size, destination, route, same day shipping, etc.

2. Should I use a fulfillment company?

This is a decision you need to make based on a number of factors discussed in our previous section, ‘How to choose between a fulfillment center and warehouse’. Warehousing can incur significant costs, and using one will be tied to your level of demand and also the geographical locations from which that demand comes.

But in the modern world of e-commerce, fulfillment centers tend to fit well with the desires of customers. They offer a robust service when it comes to ordering items and the strong relationships they have with carriers means that they can ship orders quickly and efficiently.

3. How much space do I need?

As with costs, there is no exact answer to this. But making a decision on space is going to depend very much on your ongoing demand and also on your demand forecasting. If, for example, you know you have seasonal peaks, then you will want to utilize more space in the run up to those peaks to ensure that demand is met.

But you do not want goods lying in storage at an e-commerce fulfillment warehouse for long periods of time. The underlying philosophy of using a fulfillment provider is rapid turnover without running low on stock. Plan ahead at least a year; look at both slow and busy periods in your year, and work around those periods.

4. How does order fulfillment work?

Order fulfillment is a process that deals with storing inventory, order processing, picking and packing orders received, shipping or arranging shipping for those customer orders, and dealing with any returned goods if required.

How retailers can optimize their fulfillment workflows with technology

Given that e-commerce revolves around technology, it is no surprise that tech also plays a core role in almost every aspect of order fulfillment. E-Commerce businesses can adopt and integrate many examples of tech solutions into their workflows.

Optimizing your fulfillment workflow is an essential part of maintaining and increasing sales, and keeping that customer satisfaction level high. Whether you’re managing order fulfillment in house or outsourcing it to 3PL, you can leverage operational efficiency with technology solutions. But what sorts of systems or programs should you be looking at using?

  • OMS (Order Management System)
    An efficient OMS is extremely helpful for merchants selling on multiple channels. It centralizes multichannel orders in one place, enabling a smoother order fulfillment process.
  • WMS (Warehouse Management System)
    WMSs are essential for brands with their own warehouse as well as using fulfillment centers. It can cover expiration dates for perishables, manage a steady flow of goods by date, picking and packing tasks, and more.
  • Inventory management systems
    Keeping track of on-hand inventory and inventory on purchase in real time is essential to avoid overselling and missed sales. Some advanced inventory management systems also provide integrated inventory planning functionality, which will make your replenishment more data-driven and help you release cash tied up in unsold products.
  • EDI (Electronic Data Interchange)
    This is the system most commonly used for businesses to exchange and transfer data. It helps keep track of everything from invoicing to notifications of shipments. In some cases, fulfillment centers offer end-to-end EDI solutions that cover all tasks.
  • Payment systems
    While secure payment systems may appear simple in today’s world, any retailer or fulfillment provider that is integrating this into their service must be at least PCI compliant and ideally PCI certified. While retailers may take the initial payment for goods, fulfillment centers may be involved in cash transactions when dealing with exchanges and returns. 

The order fulfillment process is something that all e-commerce brands strive to get right. Using a dedicated fulfillment center could help you on your way. Whether you make that choice or not, though, fulfillment must always be supported by robust systems and software solutions.

Utilizing technology, and the right technology at that, is an essential factor when it comes to optimizing your workflow. It’s doing that which ensures that the order fulfillment aspects of your e-commerce business work smoothly and you keep your customers happy.

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