Real life insights into fulfillment and logistics for startups and subscription box companies
In Part 1, we shared an overview of what fulfillment centers are and how they work.
In this section, we’ll discuss how to refine your current operations in order to set you up for a smooth transition to using a 3PL. You can read about the process of finding a fulfillment partner Part 3.
Moving to a 3PL has its challenges, but you can prepare ahead of time to make it a smoother transition.
In order to find the right partner, you’ll need to consider how your existing systems are set up, how you want to present your brand from a packaging perspective, and understand the capabilities of the warehouse.
Let’s go over how to make your switch to a warehouse as smooth as possible.
Tightening up your systems
Before approaching a 3PL, you can save time and money by understanding and refining your existing systems. This will help minimize future headaches by allowing you to discuss the fulfillment process, how your systems will fit together (from order processing to fulfillment to your return policy), ways to minimize costs with packaging. As Jeff Becker from Earhoox notes,
“it’s a delicate balance, but it’s important to understand your capital constraints while identifying functional areas that demand additional investment or resources such as talent and technology.”
Start by considering your sales projections for the next 3 to 6-months. This will help frame how you evaluate outsourcing, by budgeting out the time and cost it would take to fulfill in-house.
If sales take off, is it better to hire someone to handle shipping, or potentially invest in a new software solution that better integrates with a warehouse?
How your tech fits together: From a technology perspective, how well do you understand your existing systems, their strengths, and limitations?
Some warehouses have a surprisingly outdated technology infrastructure, and will require a lot of manual work (such as uploading .csv files with your order information) or weeks of development time to integrate with their system which can cost thousands of dollars.
If you have your product in multiple facilities (such as with retailers) or need to account for sales from various sources (ie., if you dropship for other eCommerce stores), you’ll need to have up-to-date information about your inventory levels across channels to help mitigate low inventory or out of stocks.
To hedge against overselling, you can use the remove products from showing feature at the eCommerce store level. Essentially, you can hide your products, so they cannot be purchased, once inventory levels reach a low quantity.
This option is usually found in the inventory settings of your site or eCommerce partners. To note: Low quantities will differ depending on the business.
Factors to consider are lead time for production vs. product turn-over. If you have a 1 week lead time (for product manufacturing) and it takes 1 month for your product to clear (sell out), start ordering goods 2–2.5 weeks in advance of your anticipated clear date to allow for delays and complete out of stocks.
By understanding your infrastructure, you can evaluate your potential partners, and plan for areas you may need to invest in. This puts an emphasis on integration, which means a warehouse that has a strong technical and operational understanding will be vital.
Most startups shoot for the cheapest offering while overlooking how much additional effort it takes to keep a smooth running operation with a fulfillment center.
Paying a slightly higher price for a quality partner will save you countless headaches with customer support which in turn improves your brand experience.
With a better running facility, you can run creative marketing campaigns to delight your customers and actually improve your customer experience (more on this below).
Setting up SKUs and Barcodes: Having your SKUs and UPCs set will make the transition to outsourcing fulfillment much smoother. At a high level, these strings of digits are used to track inventory.
By standardizing your SKU names, it will help you keep sanity when reviewing orders from your various sales outlets. Said another way, if each sales channel has a different reference name for the same product, you’ll have to constantly process exactly which product each outlet has sold. What they are:
- A SKU references a distinct type of item that you sell and is the primary piece of information used for measuring stock levels, and indicates which item to pick in a warehouse.
- They are typically descriptive, and follow a systematic nomenclature. For example, perhaps you sell Chinos. The SKU for a pair of Chino’s in Blue, sized-Medium, may be depicted as CHN-BLU-M.
- Be aware that your naming system might need to be connected to a warehouses’ or retailers’ standard as they can have different requirements.
Setting up UPCs
UPC’s are globally recognized, unique barcodes associated to a particular product. They help retailers figure out how much of your product they are selling, in part because of how easy they are to scan at checkout.
Warehouses like UPC’s because they help expedite receiving time (organizing and putting product away), and make it easy to lookup where it is located in the facility, which improves their operations, and will save you money (we’ll discuss this later in the series).
There are a few ways to go about setting up your UPC’s:
Register your business with GS1 US, which assigns each member its own identification number that appears as the first part of its UPC. You then have to create unique UPCs for each SKU (they have a service that helps you create these).
You can also try 3rd party companies, such as BuyABarCode.com, which provide unique and newly issued UPCs. This service makes it easy to generate barcode images (for example, if you want to place it in the artwork of your packaging).
Branding and customer service considerations
By branding your packaging, you create a unique purchasing experience that can make customers feel good about buying from you.
Some packaging is so exciting and well-made that customers will videotape and share their un-boxing experience. Check out BirchBox’s Twitter to see what we mean.
They use branded packaging and their presentation as part of their marketing which get people talking, and sharing their business.
Branding on the cheap: 3PL’s offer custom capabilities (inspection, kitting, etc.), but understand you will have to pay additionally for this. You will have to balance your brand presentation with cost, though there are affordable ways to still provide a top-notch experience.
Simple options include adding your logo to the shipping label, offering a custom message on the packing slip, or stickering the outside of your packaging. 20x200 offers an artistic touch to their shipping parcel:
(Source: Note To Self)
If you want to make an eye-catching impression with packaging, Lumi allows you to create custom boxes:
To create a highly crafted and beautiful un-boxing experience, some customers go for a “white-glove” fulfillment procedure.
These are complex processes that involve folding and orienting products in a specific way to provide a “Wow” experience when opening the box. This practice is widely adopted by companies such as Adore Me, Trunk Club, BirchBox, and other high-end subscription players.
These require a lot of man hours, so it will cost you — though this can make a profound impact on your customer and should be considered a marketing expense instead of a fulfillment cost.
(Source: I Love Boxes)
Handling Returns: Most companies will handle returns themselves early on in their business. We feel it is important to do as you are getting started because it keeps you close to your customers, helps you understand under what conditions products are being returned, and gives you insight into exactly what is happening throughout the process.
As your volumes increase, you will start to lean on your fulfillment partner to manage returns. When you choose to outsource returns, you need to account for the following costs:
- Customer refunds
- Return shipping
- Cost of inspecting
- Dealing with damaged or unsellable products
To account for the potential cost of returns and to help determine your policy, you can start by looking at industry standards.
Return rates vary widely by merchant size, type and merchandise category, though you can expect a rate of return to be between 3–30%; “online consumers return 20% to 30% of orders of apparel and other soft goods… [which] compares to a return rate of less than 10% for hard goods like gifts, home products and toys.” [Source: Internet Retailer]
We’ll discuss returns further in the next post. The above should give you a start to think about how you want to handle returns, and allows you to have a conversation with your partner before diving deeper into your specifics.
“Simplicity is key to running a low cost operation. Whether it’s dealing with a vendor or you’re running your own operation, you simplify in two ways:
1)You talk to people [or your team] and ask them what’s frustrating about a process. Then brainstorm solutions to remove those frustrations.
2)You document the process and figure out all the complicated steps or non-standard procedures and try to simplify the ones that cause the greatest pains.”
Iteratively simplifying your operation will dramatically lower operating costs and improve customer experience.
Anthony continues, “the challenge is there often aren’t big wins staring you in the face. It’s a long process… only to see results down the road once lots of small wins accumulate.”
By understanding your existing systems and how you want to present your product, you will be better able to guide the conversation with your warehouse. Now let’s get down to the most expensive variable of fulfillment.
The fundamentals of shipping costs:
Shipping is the bread and butter of a fulfillment center. We want you to understand the factors that go into shipping costs in order to evaluate potential warehouse partners, to help you save money now, and as you scale.
Shipping: Shipping is generally the most expensive component of fulfillment. The rule of thumb is that you want fulfillment costs to be about 4–6% of revenue, and shipping to be about 5–8% of revenue [Source: Quora, F. Curtis Barry & Company].
Important factors to consider are:
- Which carrier(s) to use
- Standard vs. expedited shipping
- Who pays for shipping?
1) Which carrier(s) to use By now you have a reasonable understanding of your own shipping rates, but it will be worthwhile to have this handy to price compare with your 3PL.
They also automatically create customs forms while walking you through the process as you shipping overseas. If you want to check rates for specific carriers, here is a list of shipping calculators from some of the most popular couriers:
- USPS — Shipping Calculator
- Canada Post — Shipping Calculator
- UK Royal Mail — Shipping Calculator
- Australia Post — Shipping Calculator
- UPS — Shipping Calculator
- FedEx — Shipping Calculator
In general, UPS or FedEx tend to be the best option for shipping heavier packages and they tend to provide better tracking and delivery guarantees (usually at a higher cost).
There are some recent nuances which complicate the picture a bit: UPS & FedEx have added new rules for dimensional-weight rate calculations, which essentially means higher volume, low weight packages (think a large, but lightweight hand bag) costs more to ship than before. So you’ll want to evaluate your options carefully. Note that all carriers base shipping rates on a variety of factors including:
- Package Size
- Package Weight
- Departing location
Package size and weight, and distance traveled (including how far it is from a major freight corridor) factor most prominently.
2) Packaging It’s possible that you aren’t using the optimal sized packaging for your product, so you will want to evaluate your options. Sometimes slightly larger boxes will come out cheaper for shipping as FedEx and UPS have some standard boxes they manage more effectively.
In the case of fragile products, you’ll want to use packaging fill that’s light such as air-packs. This way you can protect your shipment while minimizing your costs.
Avoid using peanuts to reduce weight and the impact on the environment. To search for packaging material, Uline is a popular supplier that carries pretty much anything you need. They have over 1,300 sizes of boxes, packing material, tape, etc.
You’ll want to stick with standard sized packaging because it can easily be bought in bulk and offers price savings. You can always get custom parcel packaging if need be (though a warehouse may charge you a storage fee, per pallet).
3) Standard vs. expedited shipping Choosing a partner that has multiple carrier pick up times provides flexibility for the delivery methods you provide. For example, some 3PL’s offer late pick up times, which means more of your day’s orders are processed and shipped out same day, reducing your delivery timeline.
Larger 3PLs will provide better support on shipping and will also have discounted rates to help alleviate your financial burden. If you work with a smaller facility, it can be helpful to limit your shipping options (ie., only offering ground) to help mange customer expectations and reduce fulfillment complexity (at least at the beginning).
4) Who pays for shipping? This is a balance between cost, customer experience, and ROI. Things to consider:
- Free shipping can aid in conversion rates, and is quickly becoming an industry norm, but can your margin handle this if you start using a 3PL?
- Can you increase the price of your product to help cover some of the costs of shipping?
- Can you offer flat pricing to make the decision process easier for your customers (we generally only recommend this option if you have a lot of historical data)
We’ve covered what fulfillment centers are, how they work, and delved into refining your current operations to make your switch to a warehouse as smooth as possible.
Next, we’ll move into the steps of finding a warehouse, how to qualify your options, and share ways to minimize costs even further.
// Glossary of terms:
- SKU: Stock Keeping Unit. A distinct type of item for sale that has attributes associated with the item type that distinguish it from other item types. For a product, these attributes could include, but are not limited to, manufacturer, description, material, size, color, packaging, and warranty terms. When a business takes an inventory, it counts the quantity it has of each SKU. SKUs are assigned and serialized at the merchant level. You often want the SKU to be somewhat descriptive because it can be helpful for reference. For example, if you sell backpacks that come in three colors, with no other variation, you might name them BKP-BLUE, BKP-RED, BKP-GREEN to distinguish.
- UPC: Universal Product Code, sometimes referenced as a “barcode.” They are widely used in the United States, Canada, the United Kingdom, Australia, New Zealand, and in other countries for tracking trade items in stores. Its most common form, the UPC-A, consists of 12 numerical digits, which are uniquely assigned to each trade item.
- Shipping Label: The label that is affixed to the shipping package. It provides all necessary information in order to allow for shipping, handling, and receiving.
- Packing Slip: A shipping list, packing list, waybill, packing slip (also known as a bill of parcel, unpacking note, packaging slip, (delivery) docket, delivery list, manifest or customer receipt), is a shipping document that accompanies delivery packages, usually inside an attached shipping pouch or inside the package itself.
- Freight Corridor: Highways, railways, and waterways that are used for high volumes of shipments.
- API: For the context of this discussion, know that it allows you to glean real-time data from your warehouse.
Tools and resources mentioned:
Pakible: Custom packaging, very easy to use.
Easypost: Easily integrate USPS, UPS, DHL and FedEx shipping APIs into a single application.
Shippo: Shipping API for your eCommerce site, let’s you print shipping labels, get rates, track packages, print customs forms, submit refunds and more.