Real life insights into fulfillment and logistics for startups and subscription box companies
We’ll start with an overview of how fulfillment centers how, then delve into the steps of finding the right partner in future posts.
After a product has been manufactured, all companies face the same challenge: How to get the goods to the end customer?
For startups that want to scale beyond shipping in-house, Third Party Logistics companies (3PL) offer a way to outsource the fulfillment of their products.
Fulfillment partners will store inventory in their warehouse, package the product, and ship it, which can save a startup a boat load of time and money. As you can imagine, this dramatically shifts how your business is set up from an operational standpoint.
You’ll want to be prepared in your search, because the right partner will be a trusted resource that helps you grow, while choosing the wrong option can lead to dissatisfied customers, delays and countless headaches.
Pro-tip: It’s not all about the cost, you want to make sure you find a quality partner and think about the long-term. Anthony Thomas, Founder of Sticker Mule, offers his reasoning for thinking long-term,
“when you’re small it’s almost impossible to achieve a major cost savings, but the upside is that as you grow costs won’t grow linearly if you’re constantly striving to keep things simple.
This is why it’s so important to build rapport with your partners early on. If you beat them up over price when you’re small you might get a small win, but then they won’t care to work with you to architect solutions that can deliver bigger wins down the road.”
Fulfillment 101: Fulfillment is generally understood as the steps between processing an order and making sure the product arrives at the intended customer.
On a grander scheme, the actual process can include coordinating freight from your factory (shipping from manufacturer to your warehouse), final assembly of the product, storage, packaging, labeling, and more.
Here’s an overview of the positives and negatives of working with a fulfillment warehouse: There are a number of advantages:
- Potentially cheaper fulfillment rates — By having lower cost of labor and cheaper real estate, fulfillment companies can have significant savings in their operations.
- Cheaper Shipping Rates — Fulfillment warehouses ship large quantities of items and receive cheaper shipping rates from the major couriers. They’re also well versed in the shipping logistics landscape, and can give you access to the widest range of shipping options.
- Shorter Shipping Times — Strategically choosing your fulfillment partner closer to the bulk of your customers means your customers get their orders faster.
- Freedom of time — As a growing business, your time is your most limited factor. In all likelihood, fulfillment is not your core competency, and by outsourcing this component of the business you free up more time for the things you are really good at.
Some downsides to consider:
- Expensive — Fulfillment centers need to make money, and they charge for everything from storage fees to how the shipment is packed.
- Less control — It’s your face on the product, but you no longer have direct control of when shipments get processed and sent out. If there are delays in the warehouse, the customer comes to you (and they won’t care about why your warehouse couldn’t ship it out).
- Locked in contracts — Typically, 3PLs want a contract with startups because getting vendors set up takes a lot of time, and they make their money through volume over time.
- Long on-boarding process — You have to negotiate rates, send product to the warehouse, wait for them to input it into their system, and get their software to talk with your eCommerce site and other software. It can take weeks to get up and running.
How warehouses work: Fulfillment centers house products from many vendors, and while they suggest they can handle anything, you’ll find that each warehouse has it’s own strengths and weaknesses.
Some 3PLs will specialize their offering (i.e. only do bottled beverages, hardware with lithium-ion batteries, dry packaged goods, etc.), while others focus on a particular size of company.
If you have a more complicated product or packaging procedure (think, subscription box), you’ll want to focus on warehouses that cater to this, such as Dotcom, or negotiate lower pick-and-pack fees.
Most warehouses will be open to all sorts of custom experiences, but you will often have to pay for variations. Warehouses make money through a variety of ways:
- A one-time setup charge (from a few hundred dollars to thousands)
- Monthly account management fee
- freight delivery charge
- Pallet break down and storage fees ($12 to $20+ per pallet per month)
- Charges for repackaging items and shipping, and the little discussed price gouging on shipping rates.
Fun fact: While warehouses receive discounts on shipping rates, they don’t often pass on all the savings to you, their customer.
As a practice, many 3PLs like predictability in their business (such as consistent sales volume or weekly deliveries) because it helps them to budget time and schedule labor appropriately.
It is this consistency that allows them to optimize their operation and save money. For an overview into the inner-workings of a 3PL, Matthew Carrol provides an excellent graphic:
“outsourcing fulfillment can be very beneficial, but it’s important to understand the costs to do it yourself versus a third party.
The volumes need to make sense, the storage fees depending on your particular product need to make sense, and your market or where you are shipping have to make sense.”
Next, we’ll talk about how to refine your current operations in order to make a smooth transition to outsourcing.
Glossary of terms:
- Pick-and-Pack: The process of taking an item from the shelf and putting it into the shipping package (parcel).
- Lick-and-Ship: Applying a label to the packaged item and shipping out the parcel.
- Pick or Touch fees: A fee associated with each time the warehouse “touches” an item that goes into the final package, such as taking an item out of a “pick location” i.e. a shelf in a warehouse or placing a sticker on the outside of the box.
- Kitting: When you need to combine individual items to be grouped, packaged, and supplied together. This often happens when products are first received, and need to be grouped together to be sold.
- A subscription box is a good example: For Spoil, the warehouse would need to pick the tea infuser, the hydrating mask, the disc of soap, the tea, etc. with each item representing a separate “pick.”
- WMS (Warehouse Management System): The software system warehouses use to track inventory levels.
- Case or Case Pack: Shipping packages that contain individual SKUs grouped together
- Pallet: A flat transport structure that is used to transfer large amounts of goods (often stacked Case Packs) from your manufacturer to the warehouse, within the warehouse, and often for large orders to retailers. They require a lifting device such as a forklift, pallet jack, or front loader. These have become popular interior design elements of late.
(Source: Joanne Cleary)
Tools and resources mentioned:
Sticker Mule: Custom die-cut stickers for startups.
Dotcom Distribution: eCommerce logistics partner specializing in high volume subscription boxes.